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S. HRG.

111764

FINDING COMMON GROUND WITH


A RISING CHINA

HEARING
BEFORE THE

COMMITTEE ON FOREIGN RELATIONS


UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION

JUNE 23, 2010

Printed for the use of the Committee on Foreign Relations

(
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COMMITTEE ON FOREIGN RELATIONS


JOHN F. KERRY, Massachusetts, Chairman
CHRISTOPHER J. DODD, Connecticut
RICHARD G. LUGAR, Indiana
RUSSELL D. FEINGOLD, Wisconsin
BOB CORKER, Tennessee
BARBARA BOXER, California
JOHNNY ISAKSON, Georgia
ROBERT MENENDEZ, New Jersey
JAMES E. RISCH, Idaho
BENJAMIN L. CARDIN, Maryland
JIM DEMINT, South Carolina
JOHN BARRASSO, Wyoming
ROBERT P. CASEY, JR., Pennsylvania
JIM WEBB, Virginia
ROGER F. WICKER, Mississippi
JEANNE SHAHEEN, New Hampshire
JAMES M. INHOFE, Oklahoma
EDWARD E. KAUFMAN, Delaware
KIRSTEN E. GILLIBRAND, New York
DAVID MCKean, Staff Director
KENNETH A. MYERS, JR., Republican Staff Director
(II)

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CONTENTS
Page

Hills, Hon. Carla A., former U.S. Trade Representative, chairperson, National
Committee on United States-China Relations, Washington, DC .....................
Prepared statement ..........................................................................................
Responses to questions submitted for the record by Senators:
John F. Kerry ............................................................................................
Richard G. Lugar .......................................................................................
Russell D. Feingold ...................................................................................
Kerry, Hon. John F., U.S. Senator from Massachusetts, opening statement .....
Lugar, Hon. Richard G., U.S. Senator from Indiana, opening statement ...........
Tyson, Laura, former chairperson of the Presidents National Economic Council (NEC), professor, Berkeley HAAS School of Businesss, Berkeley, CA .......
Joint prepared statement with Stephen S. Roach .........................................
Joint responses with Stephen S. Roach to questions submitted for the
record by Senators:
John F. Kerry ............................................................................................
Richard G. Lugar .......................................................................................

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FINDING COMMON GROUND WITH A RISING


CHINA
WEDNESDAY, JUNE 23, 2010

U.S. SENATE,
FOREIGN RELATIONS,
Washington, DC.
The committee met, pursuant to notice, at 2:38 p.m., in room
SD419, Dirksen Senate Office Building, Hon. John F. Kerry
(chairman of the committee) presiding.
Present: Senators Kerry, Casey, Shaheen, Lugar, and Risch.
COMMITTEE

ON

OPENING STATEMENT OF HON. JOHN F. KERRY,


U.S. SENATOR FROM MASSACHUSETTS

The CHAIRMAN. So, this very quiet hearing room will already
will, I should say, come to disorder so we can come to order.
[Laughter.]
Everybodys so quiet, its amazing.
Anyway, welcome. The hearing is now formally open. And I
appreciate everybodys patience.
I apologize for being late. We thought we had a couple of votes
coming up at 2:30, and I was going to try and vote, and then come
and open the hearing. And then, as is probably normal operating
procedure here, the votes got put off, and well sort of wait to be
interrupted, so well try to proceed ahead.
So, thank you all, including my good friend and ranking member,
Senator Lugar, for your patience andbefore we open.
Let me just say, at the top of this hearing, that President Obama
has just taken decisive action in accepting the resignation of General McChrystal. And needless to say, I think all of us would have
been happier if this distraction, interruption in the mission, had
never occurred. Im confident that there are a lot of folks in General McChrystals immediate circle who would feel similarly. But,
it has happened, and we are where we are. And I applaud the decisive, crisp, swift action that the President took in making the decision. I think it was appropriate that he did that, and I think he
made the right decision, to accept the resignation.
I also believe he made the right decision in selecting General
Petraeus to take over that command. The President made it clear
that no one is above the mission, and hes not going to accept anything less than the unified effort on this mission, within his administration and within the command structure. Thats appropriate.
So, I know General Petraeus, as we all do. We have great confidence in him. And hes a proven leader, and Im confident that the
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skills that he brings as a soldier and as a generaland also as a
diplomatwill help to make this transition a smooth transition.
American lives are on the line, and we simply cant afford a moment of distraction. Its time for all of us to be strictly focused on
the mission itself.
And this committee will be holding a series of hearings in order
to evaluate that mission and keep the American people apprised of
where we are, measured against the benchmarks that the committee has previously established.
Today, we are gathered to discuss another important issue, and
one that will be with us, in terms of the relationship, throughout
this century certainly, probably the single most important relationship that will define a lot of global events over the course of this
century, and that is, how we find common ground with a rising
China.
Were pleased to welcome two very respected experts: Ambassador Carla Hills and Dr. Laura Tyson. And, I might say, Zbig
Brzezinski, former national security advisor of President Carter,
was supposed to be here to join us this afternoon, but he had to
cancel at the last moment, due to a health issue. But, I am told
that he will be fine, and we look forward to welcoming him back
here soon.
How the United States, in concert with our friends and allies, responds to Chinas growing economic might, military capabilities,
and political influence will significantly shape the international
order of this century.
Just about every global challenge that we face requires cooperation with China. Nuclear proliferation, global economic stability,
climate change, just to mention a few. Clearly, building a positive
and constructive relationship that can benefit both of our countries
and enhance global prosperity and peace for decades to come is a
central objective for all of us. Thats why the administration has
made an energetic effort to manage and to grow the partnership,
through the Strategic and Economic Dialogue, as well as dozens of
Cabinet-level visits to China.
Still, United States-China relations, it is fair to say, remain a
work in progress. We dont always see eye to eye. Our interests
sometimes differ, and so do our approaches to shared concerns.
Whats more, both countries still mistrust each others intentions
on issues, such as Chinas defense modernization, the future of
Taiwan, and the situation in Tibet. And there is still a great uncertainty about exactly how we will manage our growing economic
interdependence.
Its striking how much of the story of United States-China relations remains yet to be written. Looking forward, as China becomes
more prosperous and powerfuland it will, absolutely and inevitablywe should not be surprised that it may also become more
assertive. The question is how China will use that rising influence
to shape global institutions, whether our cooperation can increase
as Chinas stature does, and whether China will agree, or find it
necessary and desirable, to take on global responsibilities as its
own economic and security interests expand.
This weeks announcement on the renminbi is a case in point.
Chinas decision to allow more flexibility in its currency is a wel-

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come step, and many people would argue that its a long overdue
step, toward a rebalancing of the world economy. But, it was the
subject of a very heated debate in China itself, and we will need
to watch closely to see how vigorously Beijing implements its new
policy.
Of the two most important economies of the 21st century, ours
is still the largest, Chinas is growing and will soon be the largest.
So, the important question is to see how we can and should compete, but we also need to make certain that that competition takes
place on a level playing field.
We need to do more than just talk about difficult issues, such as
indigenous innovation schemes, government procurement policies,
and protecting intellectual property. We actually need to find
meaningful actions between us that make a difference in the leveling of that playing field.
In recent days, we have seen positive steps by China to stop the
spread of nuclear weapons. And I think all of us appreciate Chinas
vote for new sanctions against Iran at the United Nations. Thats
an important cooperative effort and an important measure of
Chinas role in the world today. I hope that China will now join
with us and other members of the Security Council in aggressively
implementing these sanctions, and also in condemning North
Koreas recent aggression against South Korea.
Differences remain, however, and its impossible to ignore them.
We need to work to enhance our strategic dialogue, to increase
trust and reach new understandings. And this engagement should
include high-level military-to-military talks. And these talks
shouldnt be switched off whenever one side perceives some kind of
slight, the slight of the moment, if you will, to its particular interests. If we want to build our capacity to manage global crises together, those kinds of talks are even more important when tensions
do arise.
Even as we seek common ground with China, we will never
abandon our values. We have to continue to encourage China to adhere to international human norms for rightshuman rights, labor
rights, political rightsand environmental protection. Based on my
own conversations with Chinas top leaders, I believe that our commitment to these values can actually support Chinas own longterm efforts to build a harmonious society.
And finally, while our companies will inevitably compete in many
areas, there are challenges, such as climate change, where our two
nations should be collaborating against a shared threat, and where,
together, we have the ability to offer leadership to the world.
As todays largest producer of greenhouse gas emissions, and historys largest cumulative emitter of greenhouse gases, China and
America have a special responsibility to lead a global effort to reduce emissions, and, particularly, we can work together to develop
the clean technologies, the new technologies, the clean and alternative energy sources, of the future. The truth is that no two
nations have as much opportunity to set the mark for what we all
should be achieving. And if China and the United States engage in
this effort, and do so together, it is guaranteed that the rest of the
world will follow, and be compelled, ultimately, to do so.

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To help us look into the future and navigate the thicket of issues
facing America and China, we have two longtime China hands here
with us today. Ambassador Carla Hill served as the U.S. Trade
Representative under President George H.W. Bush, and she cochaired the influential Council on Foreign Relations Task Force on
China, and currently chairs the National Committee on U.S.-China
Relations.
Dr. Laura Tyson is the former chair of the Council of Economic
Advisors during the Clinton administration, and the former dean
of the London Business School. Dr. Tyson currently serves on
President Obamas Economic Recovery Advisory Board, and she is
a professor at Berkeleys Haas School of Business.
So, I invite both of our witnesses to feel free to summarize their
comments, if they would. We will introduce the full text into the
record as if read in full, and we look forward to your testimony.
And, again, were grateful to both of you for being here today.
Senator Lugar.
STATEMENT OF HON. RICHARD G. LUGAR,
U.S. SENATOR FROM INDIANA

Senator LUGAR. Mr. Chairman, I join you in welcoming our distinguished witnesses for this important hearing.
Chinas rising financial and strategic power is a crucial factor in
our approach to global economic, energy, and security problems.
The United States must come to grips with the incredibly complex
set of choices and opportunities that China represents.
China is demanding a greater say in the management of the
world economy through the G20 and other mechanisms. Its global
leverage has increased as it has positioned itself as the leading
creditor nation with more than 20 percent of the worlds current
account balance surplus.
According to the most recent data, China is the United States
Governments largest foreign creditor, holding approximately 23
percent of the $4 trillion we owe to other countries. The Chinese
continue to buy United States bonds at a rapid pace, but we cannot
count on this continuing indefinitely. Some thought must be given
to how we work with China to establish a more sensible global balance that depends less on Chinese credit and demand by American
consumers.
The Treasury Department decided to delay publication of the
congressionally mandated report on Chinas international economic
and exchange rate policies until after the May 27th Strategic and
Economic Dialogue with China and the June 5th G20 meetings.
Now that these meetings have concluded, Congress is eager to receive Treasurys assessment.
I look forward to our witnessess comments on Chinas recent decision to increase the flexibility of its exchange rate, which the
Obama administration has welcomed. Is this a significant step, and
can it have a positive impact on the U.S. economy?
China remains an extremely important market for United States
exports. Currently, China is our second-largest goods trading partner with more than $407 billion in two-way trade in 2008. Since
being admitted to the World Trade Organization in 2001, China

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has become the United States third-largest export market, accounting for 5.4 percent of total U.S. exports.
But this expansion of trade has not reached its full potential, in
part because of impediments to American business activity in
China. American businesses and agricultural exporters report that
operating in China is becoming more difficult, not less. We are
hearing increasingly frequent complaints about inconsistent application of rules, requirements for so-called indigenous innovation,
rising nontariff barriers to trade, inconsistent market access, and
lack of enforcement of intellectual property rights.
Civil society within China continues to face immense challenges
in promoting rule of law and human rights reform. While the
administration and the Congress have been focusing on matters related to currency reform and the China-United States trade imbalance, other issues also warrant concern.
On the military front, since announcement of the Taiwan arms
sales, the United States has made attempts to reengage Beijing,
including a recent overture by Secretary of Defense Gates on a
reciprocal visit to China this June that was rebuffed by Chinas
military.
In East Asia, the United States continues economic sanctions
against Burma, while China increases its economic engagement
with the military junta. China has been helpful in encouraging
Pyongyang to participate in the six-party talks. But at the same
time, Beijing is apparently strengthening its assistance to North
Korea, even after the sinking of South Koreas ship and the loss of
46 sailors.
Chinas global advances to secure energy assets and increase its
influence are perhaps most intense in its own backyard. China is
dedicating massive financial and cultural resources to its neighbors
in the region, with implications for traditional United States relations with Asian countries.
Energy security is a strategic interest for both China and the
United States. As the New York Times said on June 18, 2010, as
China counts on more years of global leadership in economic
growth, global warming remains a secondary concern. Secure
sources of energy to fuel that growth are what matter most.
I welcome the Obama administrations high-level attention to
energy cooperation with China, which could benefit price stability
and may enhance Sino-American cooperation on other international
security issues.
While all of this is underway, we must not lose sight of our strategic and economic relationship with Japan. As administration officials pursue new avenues to improve the United States-China relationship, we must maintain and strengthen our ties with Tokyo.
I look forward to the hearing of the testimony of our distinguished witnesses, and our questions and answers.
And I thank you, Mr. Chairman.
The CHAIRMAN. Thank you very much, Senator Lugar.
Dr. Tyson, if you would lead off, and then, obviously, Ambassador
Hills.
Thank you very much.

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STATEMENT OF LAURA TYSON, FORMER CHAIRPERSON OF
THE PRESIDENTS NATIONAL ECONOMIC COUNCIL (NEC),
PROFESSOR, BERKELEY HAAS SCHOOL OF BUSINESS,
BERKELEY, CA

Dr. TYSON. Certainly.


The testimony I have submitted was done jointly with Stephen
Roach, who is the chairman of Morgan Stanley Asia. Ive worked
with him for many years on issues of China and Asia.
We focused on some of the policy priorities that were at the center of the most recent Strategic and Economic Dialogue discussions.
They were the issues of rebalancing growth in the United States
and China; related to that, the exchange rate itself and the policies
and issues around the trade barriers that you have mentioned. Let
me highlight some of our major recommendations on each of these
issues.
First of all, I think it is important to start with the view that
Ive heard shared by both of you that the Strategic and Economic
Dialogue is an important forum in which the United States and
China can discuss issues on which they can cooperate and also
issues that divide them to come up with solutions.
At the most recent meetings, a major focus of the discussion was
global rebalancing. Now, I realize that rebalancing has become a
common phrase among economists, but its meaning is not entirely
obvious.
At the height of the great credit and export bubble of 200607,
China was running a current account surplus of around 11 percent,
widely viewed to be unsustainable, and the United States was running a current account deficit of about 7 percent, also widely considered to be unsustainable. So, both countries have to get their
imbalances down. China has to get its current account surplus
down and the United States has to get its current account deficit
down. And that to the first approximation, is what rebalancing
means.
Rebalancing also means a change in growth strategies for both
the United States and China. China has followed, very successfully,
a very aggressive export-led strategy. The Chinese now talk about,
and certainly the United States talked with China about, the need
to shift their growth strategy to depend more on domestic demand
and less on exports.
Thats what rebalancing means in China; it means bolstering
domestic demand, particularly consumption, and relying less on
exports.
In the U.S. case, its actually a bit more unclear what rebalancing means. At a macrolevel, the current account deficit reflects
the fact that for a very long period of time now, the United States
has been spending more than it has been producing as a nation.
So to reduce the current account deficit the United States must reduce its spending, particularly its spending on consumption, or increase its production or do some of both. And thats a different kind
of challenge than the rebalancing challenge facing China.
Much of our written testimony focuses on the fact that we think
China is taking its rebalancing challenge seriously. If you look at
its stimulus policiesand it cooperated quite actively with the
United States in the G20 on the need for aggressive stimulus they

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are very much investment-oriented, and, as far as we can tell, the
investment is directed to building the center and western regions
of the country to enhance development and consumption at home,
not to build export capacity for the rest of the world. This is not
another export-led investment boom in China; this is an infrastructure-led investment boom to encourage urbanization and move people from the countryside to the city. Building infrastructure in the
countryside and moving people to the cities will encourage consumption by providing the rural population with the electricity
they need to have sophisticated equipment in their homes and by
facilitating their movement from place to place, thereby improving
their access to consumer products and services.
So, we believe that the stimulus policies reflect a real commitment, on Chinas part, to shift away from exports to domestic
demand.
We also think that what China is saying about its upcoming 12th
5-year plan reflect rebalancing. China is introducing new health
care systems, new social security systems, and new educational
systems. These form the social safety net that has been absent, and
without such programs, Chinese households have been encouraged
to save to cover their own educational, health care, and retirement
needs. So, if the Chinese, in fact, build out their new social safety
net systems as they plan, Chinese households will save less and
consume more, and that will go a long way to rebalancing growth.
China is also talking a lot about the need to bolster labor-intensive
services as part of the 12th 5-year plan. The United States tends
to think of Chinas export strategy as an employment strategy. But,
actually, Chinas economy has grown much faster than its employment. Chinas development strategy has actually not been particularly labor-intensive. To boost employment growth, China needs to
encourage the development of labor-intensive services and it looks
like theyre on course to do that.
As a result of these rebalancing policies, we believe that in the
future the current account surplus in China will be significantly
lower relative to its GDP than it was in 2006 and 2007. Its already
significantly down, and we believe it will continue to trend down.
And we think that will be a very important contribution by China
to the rebalancing part of the United States-China agenda.
As far as the exchange rate is concerned, I will say a few things
about that.
First of all, we rewrote some of our testimony over the weekend
based on what the Chinese announced; but, in fact, the first draft
of our testimony would have suggested that they do, essentially,
what they didthat they move back to the managed float
exchange-rate regime that they first adopted in July 2005. The
regime in place between 2005 to 2008 had a significant effect on
the renminbi dollar rate and on the renminbi multilateral tradeweighted exchange rate. There was significant progress on RMB
flexibility during that period of time And this time, it looks like the
Chinese authorities will allow even more movement of the rate
within a broader bank.
We think that China has decided to restore the 200508 regime
now for a number of reasons, many reasons in their own interest.
Frankly, we think Chinas decision is a win-win situation. From the

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United States point of view, this is something we wanted, but it
also is something good for the Chinese economybecause they
were having trouble with speculative capital flows, with inflationary pressure and with sterilizing the effects of large purchases
of dollar assets on Chinas money supply. All of these challenges
become easier to address with an exchange rate which shows some
movement over time.
The new currency regime will also support Chinas rebalancing
agenda. The exchange rate is a relative price. And if you adjust the
relative price so foreign goods are cheaper, you will actually import
more foreign goods. And if you actually make consumers in China
wealthier because of the appreciation of the currency, therell be
more demand for domestic production. And thats essential for
rebalancing.
So, we think Chinas decision to restore its 200508 exchange
rate regime is a constructive step. We think its a win-win step.
And we can talk about the particulars of how they did it.
Let me turn, then, to the trade agenda. I know that Ambassador
Hills is going to talk about this in quite a bit of detail. I suspect
we agree on all of this.
I am concerned that Chinas trade and industrial policies of late
seem to be changing in ways that reduce the access of foreign producers to Chinas market. And nontariff barriers not traditional
tariffs are a growing problem. So-called indigenous innovation policies to support the development of Chinas high-tech companies do
not use traditional trade policies.
China is not a signatory of the WTOs Government Procurement
Agreement. The United States is. China is using preferential
government procurement of high-tech products from Chinese companies to support their development. The fact that the stimulus
package in the United States contained some controversial Buy
America provisions was interpreted by some observers in China as
a green light for their own preferential procurement practices. In
addition to such practices, other nontariff barriers hindering the
access of United States companies to Chinas market include national standards that favor Chinese companies, the lack of inadequate intellectual property protection for foreign producers, and
explicit or implicit local content rules. Many United States companies say that they have to locate a significant share of their activity
in China to gain access to its market.
I think it is very revealing that access to Chinas market by
United States companies was the first issue highlighted in the documents describing the S&ED meetings. Although the United States
was not able to convince the Chinese to drop some of the most troublesome features of their indigenous innovation agenda, the United
States did achieve some changes in Chinas product accreditation
procedures that will make it easier for United States companies to
bid for government contracts in China. This is an important first
step in easing Chinas indigenous innovation policies. And the
United States and China also agreed to ongoing, high-level discussions about trade concerns in high-technology products.
During the S&ED discussions, China also committed to proposing a more robust offer to join the Government Procurement Agreement. I believe that Chinas participation in this agreement would

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be a major step toward easing United States-China trade tensions,
especially in techology-intensive products.
In our written testimony, we suggest that theres a bargain that
can be made between the United States and China. China complains a lot about United States security controls on exports to
China. The facts presented in our testimony indicate that such controls have very little effect on United States exports to China. So
the United States can cooperate with China on this issue. Moreover, there are several recent studies recommending that the
United States can and should ease its security controls on exports
not just to China but to our other trading partners in order to bolster United States exports, without compromising United States
security interests.
So, as part of a trade deal with China, the United States could
ease some of our security restrictions on exports to China. We could
also offer to advance the recognition of China as a country with
market-economy status in the WTO. China wants this very much.
Its scheduled for automatic approval in 2016. The United States
can move the date forward. We have been telling the Chinese that
we will do so when they do something on their exchange rate. They
have now done something by moving back to the 200508 managed
exchange rate system. Now we can say, Yes, lets work with you
on getting earlier market-economy status. Lets work with you to
reduce security controls on U.S. exports. You, in turn, should make
a serious proposal to join the Government Procurement Agreement
and continue to curb the use of preferential procurement policies
to foster indigenous innovation. I think this is an outline of the
kind of bargain we might be able to strike in our trade negotiations
with China.
Finally, since Ive run out of time, just let me add two things.
First, it is very important for the United States to work with our
other trading partners in trying to influence China. One of the reasons China moved, this week on the exchange rate is not because
we were pressuring the Chinese authorities but because many
other G20 nations were doing so well. There is widespread agreement within the G20 that as part of global rebalancing, China
needs a more flexible exchange rate system that allows its currency
to appreciate over time in response to market forces. Many of
Chinas other trading partners, particularly in Europe, are also
concerned about the nontariff barriers that are part of Chinas
indigenous innovation agenda. Whenever we can work with Chinas
trading partners, we need to do that.
Second, I think we should work on forging a new transpacific
partnership agreement that can help move the United States back
into the center of regional trade negotiations in Asia. During the
last few years, many regional and bilateral trade agreements have
been signed throughout Asia, and the United States has not been
at the table. If the United States becomes the champion of a free
trade area for the Asia Pacific through the transpacific partnership,
it would give the United States a tremendous opportunity to participate in the benefits of freer trade and investment flows.
And, by the way, on green trade, that is trade related to environmental products and services; remember that APEC itself was the
organization that first negotiated a sectoral agreement for free

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trade in information technology and this agreement was later
adopted by nations around the world. APEC might be able to lead
again on a sectoral free trade agreement in green goods and services and such an agreement complement our efforts to cooperate
with China on solving global environment challenges.
And finally, let me add that our written testimony addresses the
question of whether China might adjust its holdings of U.S. Government securities in response to growing tensions in United
States-China relations. For example, if the United States pursues
a policy the Chinese deem to be an assault on their sovereignty,
such as imposing large punitive tariffs on Chinese products to force
China to adjust its exchange rate, would China respond by selling
a significant amount of these assets, driving the dollar down and
interest rates up? We conclude that there is reason to think that
they would, that we tend to exaggerate the costs to them of using
this form of retaliation and that we tend to underestimate the
strength of their nationalist sentiment in response to what they
could consider unfair and unwarranted unilateral U.S. pressure. I
think we have to keep these conclusions in mind both in military
affairs and in economic affairs.
Let me stop there.
[The prepared statement of Dr. Tyson follows:]
JOINT PREPARED STATEMENT OF LAURA TYSON, SK AND ANGELA CHAN PROFESSOR
OF GLOBAL MANAGEMENT, HAAS SCHOOL OF BUSINESS, UNIVERSITY OF CALIFORNIA, BERKELEY, CA, AND STEPHEN ROACH, CHAIRMAN, MORGAN STANLEY ASIA
Chairman Kerry, Ranking Member Lugar and distinguished members of the committee, thank you for the opportunity to testify before your committee on this important relationship.
The United States-China economic relationship is the most important bilateral
economic relationship in the world. China is the third-largest and the fastest growing major economy in the world. At current growth rates, it will pass Japan later
this year and reach the size of the U.S. economy by 2020 or sooner. The United
States is Chinas second-largest export market and China is Americas third-largest
export marketand has been the fastest growing market for U.S. exports since the
late 1990s. China accounted for 18 percent of U.S. imports and for 36 percent of
the U.S. trade deficit over 200809. China has emerged as the center of a complex
global supply chain for manufactured goods in Asia. A significant share of the value
of U.S. imports from China represents intermediate inputs and components produced throughout Asia and assembled into final products for export to the us. China
is the largest destination for foreign direct investment, much of it from companies
headquartered in the us. More than half of all U.S. imports from China come from
companies that are partially or completed owned by foreigners, including U.S. companies. This share is significantly higher for U.S. imports of high-technology products like computers and smart phones. And China has $2.4 trillion of foreign
exchange reserves, by far the largest such portfolio in the world. Most of these
reserves are held in dollars or dollar-denominated assets. China owns about 25 percent of all U.S. Treasury debt held by foreign investors.
China and the United States both reap substantial returns from the large trade
and capital flows that link their economies. But these cross-border flows are lopsided: The United States runs a large trade deficit with China and China runs a
large trade surplus with the United States; the United States is a debtor and China
is a creditor. The United States relies on its deficit with China as a means to satisfy
spending of consumers and businesses and China relies on its surplus with the
United States as a means to sustain its production and export-oriented economy.
The unbalanced nature of these flows complicates the relations between the United
States and China and contributes to tensions between them. Despite these tensions,
however, both countries are major beneficiaries of globalization and both share interests in promoting a strong global recovery and fostering sustainable and better
balanced global growth. The Strategic and Economic Dialogue (S&ED) is an important forum through which the United States and China can ameliorate the tensions
in their relationship and cooperate on policies to foster a balanced and prosperous

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world economy. In addition, the United States and China are cooperating within the
G20 and other multilateral institutions and are committed to strengthening these
institutions to address shared global challenges.
In this testimony, we examine some of the U.S. policy priorities that were the
focus of the most recent S&ED meetings: macroeconomic policies to promote and rebalance global growth; the currency issueespecially in light of recent adjustments
in Chinas exchange rate regime; and policies to reduce barriers to trade. We also
assess the possibility that China might sell some of its U.S. Government debt or
slow down its purchases of such debt to influence the outcome of a foreign policy
dispute with the United States or to retaliate against a U.S. action that China
deems to be an assault on its sovereignty. We conclude with recommendations for
U.S. policy.
I. UNITED STATES-CHINA COOPERATION TO PROMOTE A STRONG GLOBAL RECOVERY AND
SUSTAINABLE BALANCED GROWTH

1. Chinas Rebalancing Challenge


In recent G20 discussions and in the latest S&ED discussions, China has committed to cooperate with the United States to promote a strong global recovery and
to foster more balanced, sustainable global growth. Chinese authorities have
adopted ambitious policies that are consistent with this commitment and that have
already delivered measurable results. As a result of its unprecedented monetary and
fiscal stimulus measures, China recovered more rapidly than expected from the
global slowdown in 2009, ending the year with a growth rate of 8.7 percent. Chinas
strong recovery boosted global growth by providing strong demand for exports from
the United States and from Chinas other trading partners. U.S. exports to China
have rebounded much more rapidly than overall U.S. exports during the last year
and are now about 20 percent above precrisis levels. U.S. exports to China are still
growing much more rapidly than U.S. exports to the rest of the world. During the
first quarter of 2010, U.S. merchandise exports to China grew by almost 50 percent
from year-earlier levels while U.S. exports to the rest of the world grew by about
20 percent. China is now the third-largest and most rapidly growing market for U.S.
exports, with double-digit growth across a wide range of U.S. products from hightech manufactured goods to agricultural goods. Whether Chinas recent stimulus actions will also deliver on its commitment to foster more balanced future growth,
however, is not certain. Faced with a dramatic collapse in Chinas export markets
in the wake of global recession, Chinese authorities had little choice but to reorient
their growth policies in the short run. The unprecedented 11.9 percent drop of world
merchandise trade in 2009 choked off Chinas long vigorous export sector. In the
short span of 7 months Chinese exports went from boom to busta 26 percent
year over year increase in July 2008 gave way to a 27 percent decline by February
2009. Real GDP growth screeched to a standstill as measured on a sequential quarterly basis, and over 20 million migrant Chinese workers lost their jobs in exportled Guangdong province. For a nation long fixated on labor absorption and social
stability, this was the functional equivalent of Chinas dreaded recession and called
for a massive stimulus response to bolster domestic demand.
Within domestic demand, Chinas stimulus measures have focused primarily on
fixed investment. There are concerns among Chinas trading partners that this investment is adding excess capacity in manufacturing that will feed another surge
of exportsand a renewed widening of Chinas trade surplusas the global economy recovers. In fact, most of Chinas stimulus investment has been directed to
massive, multiyear infrastructure projects especially in the western and central regions of the country. (More than 70 percent of Chinas stimulus package has been
devoted to infrastructure projects, Sichuan earthquake reconstruction and public
housing projects.) The surge in infrastructure spending in turn has sparked a pickup in private-sector investment by augmenting demand for goods and services provided by private firms, especially those in the manufacturing sector. Rapid growth
in investment spending has augmented household income growth, especially in
urban areas; moreover, growth in household incomes along with targeted
proconsumption incentives for selected consumer durables has supported solid consumption growth.
On the surface, the rebalancing of Chinas growth toward domestic demand appears to be confirmed by recent data. In 2009, consumption accounted for 4.6 percentage points or about half of Chinas GDP growth, and in the first quarter of 2010,
consumption contributed a record 6.2 percentage points to Chinas GDP growth. In
2009, Chinas current account surplus as a share of GDP fell to 6.1 percent, down
sharply from its peak of 11 percent in 2007, and dropped further to only about 1

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percent of GDP in the first quarter of 2010. Chinas overall trade surplus as a share
of its economy has fallen sharply by about half during the last 2 years.
Some observers express concerns that these trends are temporary and that the
rebalancing of Chinas growth strategy will end when the global economy recovers
and global markets for Chinas exports rebound. In fact, the May trade surplus widened to $19.5 billion from a surplus of $1.7 billion in April and a modest deficit in
March. These results are consistent with these concerns and suggest that it may
be premature to celebrate the onset of a sustained structural rebalancing of the Chinese economy. But we believe that Chinas rebalancing is likely to continue over the
long term out of both design and necessity. For an externally dependent Chinese
economy, the latter motive is especially germane in the post-crisis eraan era that
is likely to face lingering headwinds from sluggish demand in the developed world.
If there was any doubt about the state of global demand in the aftermath of the
global recession in 2009, recent problems in Europe should dispel a false sense of
optimism. First, the United States and now Europethe growth in global final demand that was the sustenance of Chinas export growth is in serious trouble. And
there are compelling reasons to believe that such trouble will not be fleetingthat
it will be an enduring feature of the post-crisis environment for several years to
some. In order to avoid a sustained shortfall of export-led growth and the social instability it would imply, China needs a new source of growth. And it needs one
quickly.
A significant rebalancing of the Chinese economy is really the only answer to Chinas post-crisis wake-up call. GDP growth needs to shift away from the export- and
investment-led dynamic that powered the economy so successfully over the past 30
years toward the sector that has been left behindinternal private consumption. At
their peak in early 2007, exports and fixed investment totaled 75 percent of Chinese
GDPmore than double the 35-percent share going to private consumption. To
some extent, the low share of consumption is the result of high household precautionary saving rates necessitated by the lack of a social safety netsocial security, private pensions, medical and unemployment insurance are all lacking for most
Chinese citizens. But consumption also has been held back by slow income growth,
with wages increasing much more slowly than productivity and rising profits feeding
high enterprise saving rates. Enterprises now generate more than half of Chinas
saving.
There are signs that this situation may be changing. There have been recent significant increases (20 percent or more) in minimum wages in key places like Beijing
and Guangdong province, and several strikes have ended with sizeable wage increases. The number of young people entering the workforce is slated to decline by
almost 30 percent over the next 10 years, and survey evidence indicates that increasingly scarce younger workers may expect higher wages and better working conditions before they are willing to migrate to factory jobs far from their homes. Fully
40 percent of Chinas population remains in low-productivity agriculture, so there
is still a lot of surplus labor. But there are growing signs that the reservation wage
for surplus labor is increasing, and this may be another factor that helps rebalance
Chinas future growth.
Chinas infrastructure-led stimulus policies are building a foundation for strong
future growth in domestic consumption through job creation and through projects
that not only bolster the development potential of the western and central regions
of the country but also reduce physical bottlenecks to rural consumption and ruralurban migration. These are the regions where most of Chinas surplus labor is located. There is good reason to believe that China will use its upcoming 12th FiveYear Plan (201116) to lay out a broad framework to continue this proconsumption
rebalancing. The 5-year planning cycle has long been Beijings principal means for
refocusing and redirecting the economy. That purpose seems all the more meaningful in a post-crisis global climate that challenges one of the critical assumptions that
has underpinned the export-led growth dynamic for 30 yearsthe vigor of support
from external demand.
Chinas proconsumption plan is likely to have three major macro goalsto reduce
precautionary household saving; to temper widening income disparities; and to uncover new sources of job creation. Each of these goals will require major policy initiatives. On the saving front, its all about the social safety netnamely social security, private pensions, medical, and unemployment insurance. China has taken only
small steps in these areas. It now needs to take big convincing steps in order to
reduce the excesses of fear-driven precautionary saving. At the same time, income
inequality can only be addressed if China tackles the serious problem of lagging
rural incomesthe some 700 to 800 million Chinese who still live at relatively impoverished income levels in the countryside. Several policy initiatives will be required hereespecially tax rebates to rural families, rural land and ownership re-

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forms, IT-enabled connectivity of agricultural communities, and ongoing incentives
to sustain rural-urban migration, which is essential to boosting agricultural productivity. Finally, on-the-job creation front, China needs a blueprint for the development of large-scale, transactions-intensive services industries such as wholesale and
retail trade, domestic transportation, supply-chain logistics, and leisure and hospitality. China needs to shift its development strategy away from laborsaving manufacturing for export toward labor-intensive services for domestic consumption.
If the 12th Five-Year Plan contains half of the initiatives outlined above, we believe that China will make important progress in shifting sustained support of its
macroeconomy from external to internal demand. As a share of GDP Chinas current
account surplus has already shrunk from an 11-percent peak in 2007 to slightly over
1 percent in the first quarter of 2010. Although a significant portion of this reduction is cyclical as we noted above, there is good reason to believe that Chinas external imbalance has peaked and that a consumer-led rebalancing will mean a significantly lower current account surplus in the years ahead.
Nor do we believe that Chinese families are culturally predisposed toward high
and rising personal savingsuggesting that this transformation will take decades
to occur. With the right incentives and job-creation initiatives, we would not be surprised to see the consumption share of the Chinese economy rise from 35 percent
currently to the 42-percent to 45-percent range by 2016still low by international
standards but a major increase from current levels. The key for the 12th Five-Year
Plan is to move the needle from the old growth model to the new growth model
setting in motion a powerful rebalancing momentum that will sustain Chinese
growth for years to come.
2. The Role of Chinas Exchange Rate Policies in Global Rebalancing
Exchange rate policy has proved to be a lightening rod in United States-China
economic relations in recent years. We applaud Chinas June 19 announcement to
end the crisis-induced repegging of the renminbi-dollar cross-rate which has been
in place since July 2008. By returning to the managed float foreign exchange regime which it first adopted in July 2005, China has signaled both flexibility and
practicality in dealing with a very contentious global issue. Although the full extent
of the resulting Chinese currency adjustment is unknown, it should be stressed that
this is the same regime that resulted in a 20-percent appreciation of the renminbi
versus the dollar in the 3 years ending July 2008. Under the presumption of a sustainable recovery in the global economy, there is good reason to expect that a resumption of gradual RMB appreciation will track a similar trajectory in the years
ahead. China should be commended for having taken a very important first step in
the right direction.
It was actually an auspicious time for China to actnot just because of mounting
global pressure on the eve of the G20 meeting in Toronto but also because market
conditions may work in its favor. Recent turbulence in global currency markets
caused by the flight from the euro to the dollar, combined with Chinas reduced
trade and current account surplus, gives China an opportunity to reform its currency regime at a time when there is less upward market pressure on the RMB.
Chinas shift in currency policy also seems well aligned with the broader strategic
objectives of the Obama administration. In recent congressional testimony (June 10,
2010), Treasury Secretary Timothy Geithner argued that over time a more flexible
market-driven RMB will be good for the global economy because it will facilitate
more balanced and sustainable global growth. He also argued that it would serve
Chinas interests because it will support Chinas rebalancing agenda and because it
will enable China to pursue a more independent monetary policy. Secretary
Geithner did not argue that greater flexibility in the RMB exchange rate would reduce the U.S. bilateral trade deficit with China. Nor did he call for an appreciation
of the RMB. Rather he noted that a stronger RMB as the result of market forces
within a more flexible exchange rate system would benefit China and promote
global rebalancing. We agree with the conceptual arguments and recommendations
made by Secretary Geithner in his written testimony and we applaud his discussion
of Chinas currency policy from a multilateral perspective rather than from a contentious and misleading bilateral one.
In that vein, it is essential to put the currency issue in the context of the worlds
broader rebalancing imperatives. An RMB-dollar adjustment is not the only option
that China has to address its fair share of the global rebalancing agenda. The key
challenge for all unbalanced economiesincluding China and the United States
is to reduce their global imbalances. That is true whether those imbalances take the
American form of a saving gap and current account deficit or the Chinese form of
a saving excess and a current account surplus.

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In the case of China, the structural policies that we suspect are likely to be featured in the upcoming 12th Five-Year Plan could well be far more effective than
the more circuitous option of a currency adjustment. It is up to China to decide
which of those optionsor which combination of themworks best. The rest of the
world has a right to insist that China face up to its saving imbalance, but does not
have the right to insist on the precise mechanism that China employs to accomplish
this task. The same argument, of course, also applies to the tactics and strategy
that the United States employs to cut its budget deficit and boost domestic saving.
While the rest of the world has a right to insist that America take its rebalancing
imperatives seriously, it is the sovereign right of the United States to decide on the
best ways to accomplish this objective.
Thats not to say there isnt a compelling domestic rationale for China to allow
a stronger RMB. Indeed, RMB appreciation would certainly complement Chinas domestic rebalancing agenda both by boosting the purchasing power of Chinese consumers and by encouraging Chinese producers to shift production away from exports
toward domestic markets. Moreover, a stronger currency would temper the impacts
of imported inflationhardly inconsequential in light of Chinas recent cyclical upsurge in inflation to 3.1 percent in May 2010.
Reforming the exchange rate regime in a way that allows the RMB to appreciate
gradually in response to market forces also gives China time to liberalize its capital
markets to prepare for greater exchange rate flexibility. We do not endorse the view
expressed by many that China should make an immediate large upward adjustment
in the RMB-dollar exchange rate. Chinas June 19 policy pronouncement, which
stresses a return to precrisis floating bands, all but rules out such an action. And
with good reason: As a developing economy with a still embryonic financial system,
China must continue to focus on financial stability and potential vulnerability to
speculative capital flows. For that consideration alone, there is ample justification
for China to view a tightly managed band on the dollar-RMB relationship as an important stability anchor.
Bilateral political tensions aside, we agree with Secretary Geithner that it is critical to assess the currency ramifications of global rebalancing from a multilateral
perspective. In this regard, it bears noting that on a broad trade-weighted basis, the
RMB is up 7 percent (in real terms) from its late 2009 low and up 19 percent from
its early 2005 low. In other words, despite the repegging of the RMB to the dollar
over the past 2 years, it is factually incorrect to maintain that the RMB has not
moved in a broader global context. It is equally important to stress that there are
long and uncertain lags associated with the impacts of a shift in relative prices between China and the rest of the world on global imbalances. The example of Japan
in the late 1980s raises serious questions about whether a sizeable appreciation of
the RMB against the dollar over the next few years would have a sizeable effect
on these imbalances. After all, while the yen more than doubled in value relative
to the dollar from early 1985 to late 1988, Japans outsize current account surplus
barely budged.
Chinas decision to return to its precrisis system and allow the RMB to fluctuate
against the dollar within a tightly managed band is unlikely to eliminate U.S. concerns about the RMB-dollar exchange rate. A renewed post-crisis rebound of Chinese exports, in conjunction with sluggish U.S. job growth and unacceptably high
unemployment, has fueled congressional frustrations about the persistence of a
large bilateral trade deficit with China. As a result, pressures on China for a major
RMB revaluationor for the U.S. Treasury to name China as a currency manipulator if that doesnt occurhave intensified. Many Members of Congress believe that
a sizeable RMB appreciation relative to the dollar would be an effective way to ease
the plight of Americas beleaguered middle class. They also believe that if China
does not act voluntarily to relieve those pressures, the United States should take
offsetting action. At least, Chinas June 19 adjustment of its currency policy sends
an important signal to U.S. policymakers that the Chinese leadership takes these
concerns seriously.
Unfortunately, a significant appreciation of the RMB-dollar exchange rateor the
countervailing trade sanctions that might occur in its absencemight well backfire.
Much of the growth in U.S. imports from China has been the result of production
moving to lower cost China not from the United States but from other higher cost
foreign countries especially in Asia. China has become the center of a global supply
chain that enhances efficiency, keeps production costs down and supplies U.S. consumers with attractively priced products, purchased in large amounts by low- and
middle-income families. A significant share of the value of U.S. imports from China
represents the value of components produced in other countries and assembled in
China for sale in the United States. Chinas share of the value-added for some products may be only 2030 percent of the total value of U.S. imports from China.

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Tariffs imposed on Chinese exports to the United States in an effort to offset the
so-called RMB currency subsidy would raise the prices of these products for U.S.
consumers and drive their production not back to the United States but to other
emerging market countries, reducing the efficiencies of the supply chain and increasing production costs. The increase in prices on U.S. imports that resulted
would be the functional equivalent of a tax hike on both U.S. companies and American consumers.
Moreover, there are other equally serious analytical pitfalls to a bilateral assessment of the China problem. Yes, China accounts for the largest piece of Americas
trade deficitsome 36 percent of the average merchandise trade gap over 200809.
But the key point to stress here is that the United States had trade deficits with
over 90 countries during the same perioda multilateral imbalance that stems from
the unprecedented shortfall in U.S. saving discussed below. Lacking its own saving,
the only way for the United States to keep growing is to import surplus saving from
abroad and run a large current account and multilateral trade deficit in order to
attract foreign capital. The Chinese piece may account for the largest share of this
multilateral imbalance but that is more likely traceable to conscious outsourcing decisions of U.S. multinationals and strong consumer preferences for low-cost, highquality goods made in China than to unfair trading practices. The bottom line is
that Americas multilateral trade imbalance cannot be addressed by putting pressure on a bilateral foreign exchange rate with China.
Finally, it is important to emphasize that if the U.S. Congress were to impose
trade sanctions on imports from China, it is highly likely that China would retaliate. That retaliation could take one of three forms: lodging a WTO complaint; imposing tit-for-tat trade sanctions on U.S. exports to China; or reducing demand for U.S.
Government securities. The latter two options would hardly be inconsequential for
the United States. Tariffs on U.S. exports to China would hit Americas third-largest
export marketa serious problem for the Obama administrations goal of doubling
U.S. exports over the next 5 years. Similarly, reduced Chinese buying of U.S. Treasuries would be highly problematic for the funding of the Federal deficit at attractive
interest rates and could trigger a spike in U.S. interest rates, a sharp drop in the
dollars value and renewed instability in global financial markets. (The possibility
that China might respond to U.S. pressure on its exchange rate policy by adjusting
its demand for U.S. Treasuries is discussed below.)
3. The U.S. Rebalancing Challenge
Rebalancing growth was a major topic at the recent S&ED meetings and U.S. officials agreed on the need to rebalance growth of the American economy away from
consumption and large Federal Government deficits toward higher household saving
rates, greater reliance on exports and investment, and sustained deficit reduction.
U.S. officials emphasized the Obama administrations multiyear plan to achieve $1
trillion in deficit reduction over the next decade. The plan includes freezing nonsecurity discretionary spending for 3 years, reducing defense spending in Iraq and
Afghanistan, and allowing the 20012003 tax cuts for households earning more than
$250,000 to expire. According to the administrations latest projections, this plan
would reduce the deficit from 10.6 percent of GDP in 2010 to 3.9 percent by 2015,
a record 5-year reduction that would occur despite an average unemployment rate
of 7.9 percent during the period. If adopted, this plan would be a significant step
toward rebalancing the U.S. economy, but it would leave the United States with a
projected average deficit of 3.9 percent of GDP between 2015 and 2020, and it would
not stabilize the federal debt to GDP ratio, which would continue to rise through
2020 and beyond. As long as the debt to GDP ratio is rising, U.S. fiscal policy is
not on a sustainable long-run path. This could prove problematic for global investors, including the Chinese, who are currently willing to purchase U.S. Government
debt at interest rates that are at or below historical averages.
During the S&ED discussions, U.S. officials assured their Chinese counterparts
that the Obama administration is committed to reducing the deficit to 3 percent of
GDP and stabilizing the debt to GDP ratio by 2015. President Obama has created
a special bipartisan National Commission on Fiscal Responsibility and Reform
charged with the task of proposing additional spending cuts and/or revenue increases to bring the primary budget deficit into balance and thereby stabilize the
debt to GDP ratio in that year. Primary balance requires that total Federal Government spending excluding interest payments on the debt, equal total Federal Government revenues. According to the administrations latest projections, the primary deficit will be around $174 billion in 2015; by contrast, according to the most recent
Congressional Budget Office projections, the primary deficit will exceed $250 billion
in that year, and many private sector projections are even larger.

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A recent study by the Center for American Progress (CAP) found that closing a
primary budget gap of $250 billion in 2015 by spending cuts alone would require
a cut of almost 7 percent in every area of federal spending, except interest payments
on the debt. If cuts in Social Security spending, additional cuts in Medicare and
Medicaid spending beyond those in the health care reform, and additional cuts in
defense spending beyond those in the Presidents budget are excluded, balancing the
primary budget by spending cuts alone would require a 16-percent cut in the rest
of government spending. CAP estimates that closing the primary budget gap by revenue increases alone would require a 7.3-percent increase in all federal taxes and
fees. If those making less than $250,000 a year are excluded, taxes and fees collected from those making more than $250,000 a year and from U.S. corporations
would have to increase by almost 25 percent. These calculations make it very clear
that balancing the primary budget by 2015 will require some combination of very
painful spending cuts and revenue increases.
The Commission is charged with making recommendations in December 2010.
Given the size of the fiscal problem and the highly charged partisan atmosphere
a climate that may well worsen after the November electionsit is unlikely that the
Commission will be able to agree on major recommendations and that such recommendations will be adopted by Congress. So even though the deficit as a share
of GDP is likely to decline significantly as the economy recovers and as temporary
stimulus and recovery measures die out, the United States will face significant challenges to deliver on its commitment of rebalancing the U.S. economy through fiscal
consolidation.
Rebalancing U.S. growth also requires more than a sustainable fiscal path. It also
requires reducing the gap between the growth of spending and the growth of income
in the United States, and this requires an increase in national saving. Americas net
national saving ratethe sum total of deprecation-adjusted savings of households,
businesses, and the government sectorturned negative in 2008 before plunging to
a record low of 2.6 percent of national income in 2009. This is the most serious
shortfall of domestic saving by a leading nation in modern history. Just as China
must reduce its saving surplus to deliver on its rebalancing commitments, the
United States must reduce its saving gap to do the same. Between 2000 and 2008,
U.S. saving declined both because of increases in the federal budget deficita measure of government disservingand because of a dramatic drop in household saving.
During the recession, the household saving rate has recovered somewhat, rising
from essentially zero in 2007 to about 4 percent in 20082009 before falling back
to about 3.6 percent in April 2010. Many economists predict that the household saving rate will rise during the next several years to its historical average of about 7
percent, but there is considerable uncertainty about this. In the S&ED discussions,
the United States promised to introduce policies to reinforce rising household saving
rates but did not offer any specifics, and policies tried in the past have not been
very effective.
As part of its rebalancing agenda, the administration has also set a goal to double
U.S. exports over the next 5 years and has introduced supporting policies and organizational changes. An active U.S. trade policy to reduce access barriers to U.S. exports in rapidly growing emerging markets including China is essential to realizing
this goal. We discuss trade policy in United States-China relations in the next section of this testimony. Unfortunately, since Europe is a major destination for U.S.
exports and since European companies are major competitors of U.S. companies in
China and other rapidly growing export markets, the recent slowdown in Europe
and the sharp drop in the value of the euro pose serious downside risks to strong
U.S. export growth over the next few years.
Nor would such growth ensure a sustained reduction in the U.S. trade deficit and
current account deficit as the economy recovers. The size of these deficits depends
on both exports and imports and reflects the size of the U.S. saving gap, or the gap
between how much the U.S. produces and how much it spends. During the recession, this gap, as measured by the current account deficit as a share of GDP, declined significantly to 2.9 percent in 2009 from its 2007 peak of 6 percent of GDP.
This drop in the saving gap is primarily the result of a sharp reduction in private
sector spending relative to private sector income, as U.S. households and businesses
have curtailed spending to rebuild balance sheets and deleverage their financial positions. Despite the retrenchment in private sector spending relative to income, the
current account deficit, which is a measure of the national saving gap, has remained
sizeable because the government deficit has increased as a result of tax cuts and
spending increases to combat the recession.
Most forecasters predict that the United States will continue to run a significant
current account deficit around 3 percent of GDP for the next several years if the
fiscal deficit is reduced and if the household saving rate increases from its historic

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lows of the 20022007 period. A deficit of this size would roughly stabilize foreign
U.S. debt as a share of GDP. Provided the United States convinces China and other
global investors of its commitment to a sustainable long-term fiscal path, it is likely
that the United States can finance a current account deficit of this size with reasonable long-term interest rates on U.S. Government debt in the 45-percent range.
What happens to the U.S. trade and current account deficits and to U.S. borrowing requirements from the rest of the world depends primarily on what the
United States does to increase private saving and to reduce government dissaving.
Chinas trade and exchange rate policies are of second-order importance. If the
United States fails to sustain a significant reduction in its saving gap, its trade and
current account deficits will rise again as a share of GDP as the economy recovers.
That will be the case even if China succeeds with its own rebalancing agenda and
reduces its current account surplus as a share of its GDP and even if China moves
to a pure market-determined exchange rate. The risk in this case would be that of
an asymmetrical global rebalancinga scenario in which China makes more
progress in transitioning to a consumer-led economy than the United States makes
in closing its saving gap.
The odds of an asymmetrical rebalancing scenario should not be minimized. Chinas stimulus policies and the likely components of the 12th Five-Year Plan indicate
that China could well make significant progress in rebalancing its economy over the
next several years. In contrast, the stimulus policies in the United States, while essential and justifiable to combat the recession, have exacerbated the long-run saving
gap and have not rebalanced growth away from consumption toward exports and investment. Moreover, given the partisan atmosphere in Congress, passage of a credible multiyear deficit reduction plan to reduce the Nations saving gap on a sustained basis once the economy has recovered seems unlikely, at least in the near
future.
II. AN ACTIVIST TRADE POLICY TO LEVEL THE PLAYING FIELD IN CHINA AND SUPPORT
U.S. REBALANCING

China is now the largest exporter and the third-largest importer in the world. It
is the third-largest and fastest growing market for U.S. exports in a wide range of
products. If the United States is to succeed in rebalancing its growthshifting from
credit-driven consumption and housing toward investment and exportscontinued
rapid growth in U.S. exports to China is essential. China also receives a major share
of the foreign direct investment of U.S. multinational companies, many of which
have extensive and growing operations there. Offshore Chinese production platforms
are critical to efficiency solutions for high-cost U.S. manufacturers and support their
production, employment, profits, R&D and investment in the us. Access to Chinas
large and growing market is a significant factor in the success of many U.S. businesses, both large multinational companies and many small- and medium-sized
companies as well. Reducing barriers that impede the access of U.S. companies to
Chinas markets is and should be a major objective of U.S. trade policy. The Obama
administration rightly accorded priority to this goal in the recent S&ED discussions,
focusing in particular on the effects of Chinas innovation policies, government procurement policies, and foreign direct investment policies on American companies exporting to and/or producing in China.
During the last few years, many American companies (along with European and
Japanese companies) have raised concerns about Chinas so-called indigenous innovation policies to promote the development of Chinese owned technology and intellectual property and to reduce Chinas dependence on foreign technologies. Initially,
the call for indigenous innovation was more hortatory than real. But recently the
call has been given practical effect through policies that include not only strong incentives for innovation by Chinese companies but also policies that discourage the
participation of foreign companies in technologies or sectors deemed to be strategic
by the Chinese Government. In a recent survey of 388 U.S. companies conducted
by the American Chamber of Commerce in China, 28 percent said that they are already losing business as a result of Chinas indigenous innovation policies, and 57
percent of high-tech companies said that they expect to lose more business in the
future as these policies are fully implemented.
Seven of the eight top challenges to doing business in China identified by the surveys respondents relate to obstacles posed by the policies of the Chinese Government in a wide range of areas, including procurement, standard setting, intellectual
property protection, subsidies and approvals for foreign direct investment. These
survey results reveal a growing concern among American businesses that China is
adopting more restrictive promotional policies that favor Chinese companies and
that pose significant access barriers to foreign companies doing business in China.

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There is mounting evidence that Chinas trade and industrial policies are changing
in ways that are impeding access of foreign producers to Chinas market and that
fall outside of WTO rules and enforcement procedures.
Preference in government procurement has recently become a key weapon in Chinas arsenal of indigenous innovation policies. According to Chinas long-term plan
for scientific and technological development, the government should establish a priority procurement policy for important high-tech products and equipment developed
by domestic enterprises with independent intellectual property. Since China is not
a signatory to the Government Procurement Agreement (GPA) of the WTO, its procurement procedures are not covered by the agreement and not actionable at the
WTO. But Chinas preferential treatment of its domestic producers in government
procurement is not an isolated development. Indeed, Chinas preferential procurement policies were given an implicit green light in 2009 when several nations that
are GPA signatories framed their stimulus actions to provide support to their own
companies and workers. (The Buy America provisions of the U.S. stimulus package are a case a point. Although these provisions did not have a significant effect
on procurement and trade in the us, they did send a strong signal to China.)
In November 2009, several of Chinas most powerful ministries issued a joint circular, announcing the intent to create a national catalogue of indigenous innovation products for government procurement, and proposing accreditation conditions
to determine whether particular products qualified for inclusion in the catalogue. Although the accreditation conditions do not include explicit restrictions against the
products of foreign-owned companies, they effectively deny access to such products
if the technology does not originate in Chinaeven if the products are entirely produced in China, with 100 percent local content. Thats because most of the products
sold by American companies in China embody many technologies sourced from the
United States and other locations and also because American companies are reluctant to develop technologies in China as a result of inadequate intellectual property
protection there.
We are encouraged that the recent S&ED discussions made some progress on the
indigenous innovation and related government procurement issues, although China
did not agree to a U.S. request for full suspension of its indigenous innovation policy. Instead, China confirmed its commitment to innovation policies consistent with
the principles of nondiscrimination, intellectual property protection and market
competition and agreed to hold high-level bilateral talks on such policies. China also
agreed that the terms of technology transfer should be shaped by agreements among
companies without government interference. In response to U.S. concerns, China removed several troubling conditions from its product accreditation circular, including
the requirement that products be patented or trademarked in China, and agreed to
delay final implementation of the national catalogue to assess public comments.
China also promised to submit a revised offer to join the WTO Government Procurement Agreement by July. Given the importance of the government and of stateowned companies in the Chinese economy, Chinas participation in this agreement
should be a major objective of U.S. trade policy. As part of its WTO accession agreement, China committed that state-owned and state-invested companies would make
their decisions solely on commercial considerations and that the government would
not attempt to influence these decisions either directly or indirectly. In principle,
these commitments are enforceable through the WTO dispute settlement mechanism. But U.S. companies frequently complain that the procurement decisions of
state-owned companies either follow the decisions of state agencies or are influenced
by government actors. A convincing bid by China to join the GPA could help assuage
these concerns.
In response to Chinese concerns, the United States softened its position on two
key issues of longstanding interest to China. First, the United States promised to
ease restrictions on some high-technology exports to China. While this is a priority
issue for China, U.S. controls on such exports have only a small effect on U.S. trade
with China. According to recent estimates, only about 0.3 percent of all U.S. exports
to China and about 0.6 percent of all U.S. advanced technology exports to China
require an export license. The figures for Europe are comparable: 0.2 percent of all
U.S. exports and 0.4 percent of all U.S. advanced technology exports to the EU require a license. Moreover, around 80 percent of the exports to China that require
a license receive a license exemption and the value of all denied licenses is minimal.
Second, the United States agreed to consult with China on its desire to be accorded
market economy status within the WTO and scheduled consultations for the fall
meeting of the United States-China Joint Commission on Commerce and Trade. In
its original accession agreement to the WTO, China agreed to be treated as a nonmarket economy in antidumping and countervailing duty cases. As a result, the
United States or any other WTO member can initiate an antidumping investigation

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against Chinese products using the product prices of a third country as a benchmark. This makes Chinese firms especially vulnerable to antidumping cases and the
imposition of antidumping tariffs on its products. As part of its WTO accession,
China also agreed to annual compliances reviews of its implementation of its accession agreement.
So far, the United States has been reluctant to recognize Chinas status as a market economy and has posed several conditions that China must meet including the
adoption of a market-based exchange rate regime. Now the United States will have
to decide whether Chinas decision to allow the market to determine the RMB-dollar
rate within a managed band satisfies this condition. We think it should and we
think it sets the grounds for progress on Chinas bid for market access status during
the upcoming JCCT consultations. The United States will lose its ability to use the
market access issue as a bargaining chip with China in 2016 when it will be accorded such status automatically.
Both the United States and China have been major beneficiaries of the growth
in world trade and foreign direct investment triggered by the WTO and both have
been active users of WTO enforcement to address trade disputes, including bilateral
disputes. In recent testimony, Alan Wolff, cochair of Dewey & LeBoeufs International Trade Practice Group, examined the history of United States-China trade
relations within the WTO and concluded that the United States has enjoyed reasonably positive results. The United States has brought WTO cases against China
when the U.S. Government has the support of the relevant businesses or industries
and when it believes it can persuade a WTO panel that China is violating its WTO
obligations. China has often ceased the practices in question without going through
a formal dispute settlement panel process.
But the future is likely to be more challenging because many of the practices at
the center of United States-China trade frictions and many of the promotional policies playing a more prominent role in Chinas development strategy are either inadequately covered or are difficult to enforce by the WTO. These practices include indigenous innovation policies, discriminatory procurement behavior by state-owned
enterprises, national standards that favor national champions, lax enforcement of
intellectual property protection and implicit or explicit local content rules for participating in major economic sectors like wind and other renewable energies. Such practices are a violation of the spirit and in some instances the law of Chinas WTO commitments and harm not just U.S. companies but companies from other developed
and emerging market nations. Thats why the United States should continue to
treat market access barriers as a priority issue in the S&ED discussions, should
continue to lodge WTO cases against such barriers when they violate Chinas WTO
commitments, and should encourage Chinas other trading partners to address such
barriers in regional and multilateral discussions.
III. CHINAS HOLDINGS OF UNITED STATES DEBT AND UNITED STATES-CHINA RELATIONS

As of April 2009, Chinas held over US$2.4 trillion in foreign exchange reserves,
by far the largest in the world. Its holdings of U.S. Treasury debt totaled $900 billion, or about 11 percent of total UST debt held by the public and about 25 percent
of total UST debt held by foreign investors. (China also holds around $405 billion
or about 6 percent of U.S. agency debt, primarily Fannie Mae and Freddie Mac
debt). At current trends, even with continued rebalancing in China and smaller current account surpluses as a share of GDP, Chinas FX reserves will continue to
grow, albeit at a slower pace, and are likely to top $3 trillion by 2011. Given the
lack of attractive nondollar currency alternatives, exacerbated by the uncertainty
and turbulence in euro-denominated assets, it is likely that a significant share of
Chinas growing reserves will continue to be held in U.S. Government securities.
And even if there is a sustained increase in U.S. private saving and a significant
reduction in the federal budget deficitboth of which are far from certainit is
highly likely that the United States will continue to run a significant current account deficit in the 3-percent to 4-percent range and will continue to depend on foreign investors, including China, to finance its saving gap. Moreover, given the sheer
size of Chinas holdings of U.S. dollars and government securities, a precipitous action by China to shift out of U.S. dollar assets could cause a sizeable increase in
long-term interest rates in the United States, and a sharp decline in the prices of
U.S. Government securities and the dollars value. Even cutting the share of Chinas
holdings of U.S. Treasury securities by 5-percentage points would probably be
enough to rock global financial markets, with damage on both the United States and
China. China would sustain capital losses on its large dollar holdings as a result
of falling prices on U.S. Government securities and a drop in the dollars value.

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Despite the prospect of such capital losses, would China be willing to sell some
of its dollar holdings to respond to a foreign policy dispute with the United States
or to retaliate against what it deemed to be an assault on its sovereignty? For example, if the United States enacted broad-based trade sanctions on Chinas exports because China does not succumb to U.S. pressure for a sizeable RMB appreciation,
would China retaliate by selling some of its stock of U.S. Government assets or reducing its future purchases of such assets? Many observers believe that China
would not take such actions, at least not on a meaningful scale, because they would
impose painful capital losses on China. Even if such losses were significant, however, China might be willing to bear them in retaliation for what it perceives to be
unfair trade or other policy sanctions that infringe on its sovereignty. There is every
reason to believe that China would view such U.S. actions as an act of economic
aggression. Nationalist sentiment inside of China is very highsuggesting that Beijing would be under considerable pressure to take retaliatory measures irrespective
of any potential portfolio losses. There is far more to Chinas FX management objectives than simply seeking optimal rates of financial return.
Moreover, as Professor Eswar Prasad explained in recent testimony before the
United States-China Economic and Security Review Commission, the potential for
losses in the value of Chinas foreign exchange reserves could prove to be quite modest for three reasons:
1. A spike in U.S. interest rates in response to a selloff of U.S. assets by China
would impose a capital loss on the value of Chinas U.S. Treasury holdings on a
mark to market basis. But given its large stock of reserves and the fact that it has
no obvious liquidity needs, it is likely that China values its assets on a hold to maturity approach rather than a mark to market approach.
2. A decline in the value of the dollar against other major currencies triggered
by Chinas action would reduce the RMB value of Chinas dollar-denominated holdings, if the RMB appreciated relative to the dollar. Otherwise, China would suffer
capital losses on the value of its euro and yen assets as the dollar declined, but it
would benefit from enhanced competitiveness if the RMB declined with the dollar
against the currencies of its other major trading partners.
3. A sizeable appreciation of the RMB against the dollar would lead to a sizeable
capital loss on the value of Chinas dollar holdings measured in local currency. But
the loss could be offset over time as China moves forward on exchange rate flexibility, capital market liberalization, and reserve currency status.
Prasad concludes that a threat by China to move away from U.S. Treasuries is
a credible threat that should be taken seriously by U.S. policymakers. We agree.
And under current market conditions, such a threat could trigger investor concern
about the huge financing needs of the U.S. Government, causing a sharp spike in
interest rates and a crisis of confidence in U.S. sovereign debt.
China has repeatedly expressed its desire for FX portfolio diversificationnamely,
to put in place a disciplined program to reduce its existing holdings of U.S. Government securities and to slow down the acquisition of new holdings. It has been attempting to do this in part through the establishment of the China Investment Corporation, a sovereign wealth fund with an initial capital base of $200 billion. But
this is a small amount relative to Chinas overall dollar holdings. The real problem
for China is that there are no relatively safe investments other than U.S. Government bonds that are deep and liquid enough to absorb a significant share of the
massive inflow of dollars that enter China each year as a result of its large trade
surplus, inward foreign direct investment and hot money in anticipation of a significant RMB appreciation. And the dollar-recycling strategy is, of course, heavily dependent on Beijings desire to maintain a relatively tight relationship between the
RMB and the dollar. Overall, that means that China is likely to continue to hold
large amounts of dollar assets and that these holdings will grow each year by a sizeable amount.
IV. RECOMMENDATIONS

The S&ED is an important forum through which the United States and China can
ameliorate the tensions in their relationship and cooperate on policies to foster a
balanced and prosperous world economy.
The United States should continue to cooperate with China in the G20 on macroeconomic policies to support a strong global recovery and to foster more balanced
global growth in the future.
Chinas stimulus policies fostered a strong rebound of the Chinese economy and
boosted global growth by providing strong demand for exports from the United
States and Chinas other trading partners in 2009 and through the first half of
2010. Chinas stimulus policies helped rebalance Chinas growth away from depend-

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ence on exports and toward domestic demand. In 2009, consumption growth accounted for about half of Chinas GDP growth and Chinas current account surplus
as a share of its GDP declined by nearly 50 percent.
We recommend that China continue to rebalance its future growth in order to increase the contribution of consumption and to reduce the contribution of exports,
and we believe that China will do so out of both necessity and choice. The likelihood
of slower consumption growth in both Europe and the United States over the next
several years will mean slower growth in the demand for Chinas exports. To preserve social stability, on which the legitimacy of its leadership depends, China must
boost domestic demand to absorb its growing labor force, to move surplus labor from
low-productivity agriculture to higher productivity manufacturing and services, and
to reduce rural-urban income gaps.
We believe that Chinas infrastructure-led stimulus policies are building the foundation for strong future growth in domestic consumption. We also recommend and
expect that Chinas upcoming 12th Five-Year Plan will spur accelerated proconsumption rebalancing through investments in Chinas social safety net, through
policies to promote services industries and through tax and other policies to reduce
urban-rural income inequality.
We believe that as a result of its consumption-led rebalancing, Chinas multilateral trade and current account surpluses will be significantly lower as a share of
GDP in the future than they were in the peak years of 20062008.
Chinas exchange rate should be assessed from a multilateral perspective rather
than from a bilateral, dollar-centric perspective.
We applaud Chinas June 19 decision to end its crisis-induced RMB-dollar fixed
peg and return to the managed float foreign exchange regime it first adopted in
July 2005. A more flexible RMB driven by market forces benefits the global economy
because it facilitates more balanced, sustainable global growth. It is also in Chinas
interest because it supports Chinas rebalancing goals and it allows China to pursue
a more independent monetary policy. At the same time, a tightly managed band on
the dollar-RMB exchange rates is an important stability anchor for Chinas transition to more open capital markets. Chinas decision to return to a more flexible currency regime and allow the RMB-dollar rate to move within a managed band will
allow the RMB to appreciate gradually in response to market forces. Over time, a
stronger RMB will contribute to Chinas rebalancing by boosting the purchasing
power of Chinese consumers and by encouraging Chinese producers to shift production toward domestic demand and away from exports.
We do not endorse the view that China should make a large adjustment in the
RMB-dollar rate at this time. The RMB has already appreciated significantly in real
terms on a multilateral trade-weighted basis. The key imperative for China is to reduce its saving surplus and rebalance its macrostructure. Proconsumption policy initiatives will be more important than changes in the RMBs trade-weighted exchange
rate in achieving these goals. The United States should refrain from making explicit
demands about how China should go about implementing its rebalancing agenda.
In particular, the choice between proconsumption structural adjustments and the
RMB-dollar exchange rate should be left to China.
A significant appreciation of the RMB relative to the dollar will not have a significant effect on the U.S. trade deficit or on U.S. employment. Much of the growth in
U.S. imports from China has been the result of production moving to lower cost
China not from the United States but from other higher cost countries, especially
in Asia. And Chinas bilateral trade deficit with the United States needs to be seen
as but one piece of a much broader multilateral problem, reflecting Americas large
saving gap.
The United States should not impose tariffs on Chinese exports if there is not a
significant appreciation of the RMB. Such tariffs would drive production to other
emerging market economies not to the United States. In addition, China would retaliate in one of three ways all of which would be damaging to U.S. interests: lodging a WTO complaint that would almost certainly prove successful; imposing tit-fortat tariffs on U.S. exports to China; or reducing demand for U.S. securities.
Section 3004 (b) of the Omnibus Trade and Competitiveness Act of 1988, which
requires the Treasury to issue a biannual foreign exchange report assessing whether
U.S. trading partners are manipulating their exchange rates vis-a-vis the dollar,
has become dangerously politicized and should be repealed or revised. Currency values should be assessed on a multilateral basis rather than a bilateral basis, and the
International Monetary Fund, rather than the U.S. Treasury, is the appropriate
multilateral organization for evaluating the exchange rate policies of member countries.
The U.S. current account deficit is the result of the Nations saving gap or the
gap between how much the United States is producing and how much it is spending.

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To reduce this gap, the United States must reduce the federal budget deficit and,
as the economy recovers, must increase the household saving rate, which fell to
nearly zero during the 20012007 period. A higher household saving rate will require that the United States rebalance growth away from consumption toward reliance on exports and investment.
During the recession, the U.S. saving gap has declined relative to GDP, primarily
as a result of a sharp temporary increase in private saving as households and
businesses deleverage. But the saving gap has remained substantial as a result of
stimulus policies that have caused a big increase in dissaving by the Federal Government. What happens to the U.S. current account deficit in the future as the economy recovers depends on what the United States does to reduce its saving gap.
Chinas trade and exchange rate policies are of second-order significance. If the
United States fails to reduce this gap, its trade and current accounts deficits will
rise again as a share of GDP even if China succeeds in rebalancing its economy.
The possibility of an asymmetrical global rebalancing scenario remains a very real
risk. Chinas stimulus policies and the likely proconsumption thrust of the upcoming
12th Five-Year Plan indicate that China should make significant progress in rebalancing its economy over the next several years. In contrast, the stimulus policies
in the United States, although essential and justifiable to offset the 20082009 recession, have exacerbated the long-run saving gap and have not rebalanced growth
from consumption toward exports and investment. And given the partisan atmosphere in Congress, passage of a credible multiyear deficit reduction plan to reduce
the saving gap on a sustained basis once the economy has recovered seems unlikelyat least in the near future.
According to projections by the OMB, the CBO, and private forecasters, U.S. fiscal
policy is not on a sustainable path: in the absence of additional deficit reduction
policies, the Federal Governments debt will continue to rise relative to GDP
through 2020 even if the economy recovers from the 20082009 recession.
At the S&ED discussions, the United States committed to adopting policies to
achieve fiscal sustainability in the medium to long run and to stabilize the debtto-GDP ratio. Given the size of projected Federal Government deficits, these policies
will require some combination of painful spending cuts and revenue increases. We
recommend that the Congress work with the administration to pass a credible
multiyear deficit reduction plan to stabilize the debt to GDP ratio. This plan should
take effect gradually as the economy recovers: policies to reduce the deficit too
quickly will slow the recovery and increase the losses in potential output from high
unemployment and excess capacity.
Access to Chinas large and growing market is a significant factor in the success
of many U.S. businesses, both large multinational companies and many small- and
medium-sized companies as well. Reducing barriers that impede the access of U.S.
companies to Chinas markets is and should continue to be a major objective of U.S.
trade policy.
Chinas industrial policies appear to be changing in ways that are reducing access
of foreign producers to Chinas market and that fall outside of WTO rules and enforcement procedures. Indigenous innovation policies, discriminatory procurement
behavior by state agencies and state-owned enterprises, national standards that appear to favor national champions, lax enforcement of intellectual property protection, and implicit or explicit local content rules in strategic activities like renewable
energy are areas of growing concern to U.S. companies. The United States should
continue to negotiate with China to reduce these barriers both in the S&ED discussions and in regional and multilateral discussions that include Chinas other trading
partners who are also disadvantaged by such barriers.
Given the importance of the government and of state-owned companies in the Chinese economy, Chinas participation in the Government Procurement Agreement
(GPA) of the WTO should be a major objective of U.S. trade policy. The United
States should negotiate with China to ease U.S. security controls on exports to
China and to advance the timing for the recognition of Chinas market economy status in the WTO (currently scheduled for 2016) in return for a strong offer by China
to join the GPA. A bargain along these lines could also help revitalize the Doha
talks, something the United States and China committed to do at the recent S&ED
meeting.
The United States should take the lead in negotiating a Trans-Pacific Partnership
agreement as a major step to the creation of a free trade area for the Asia Pacific.
Several bilateral and regional preferential trading agreements have recently been
signed in Asia, and the region is heading toward the de facto creation of an economic bloc that would be discriminatory against the United States. The completion
of a Trans-Pacific Partnership agreement would arrest this disturbing trend and
could re-ignite APECs role in global trade liberalization. In the 1990s, APEC played

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a key role in the negotiation of a global agreement liberalizing trade in information
technology products. A revitalized APEC could play a similar role in the creation
of a global agreement on trade in green technologies and products.
A threat by China to shift the allocation of its vast foreign exchange reserve portfolio away from U.S. securities to respond to a foreign policy dispute with the
United States or to retaliate against a U.S. policy deemed to be an assault on Chinas sovereignty is a credible threat that should be taken seriously. Even the suggestion of such a move could trigger concerns among global investors about the huge
financing needs of the U.S. Government, causing a sharp spike in interest rates, a
crisis of confidence in U.S. sovereign debt, and a collapse in the dollar. As the
worlds largest external borrower, the United States must exercise great caution in
exerting undo pressure on its most important foreign lender.
References
Michael Linden and Michael Ettlinger, Restoring Fiscal Balance: The new Deficit
Commissions 2015 Targets, Center for American Progress, April 26, 2010.
Eswar Prasad, The U.S.-China Economic Relationship: Shifts and Twists in the
Balance of Power, written testimony, hearing on U.S. Debt to China: Implications
and Repercussions, U.S.-China Economic and Security Review Commission, February 25, 2010.
Stephen S. Roach, Consumer-Led China, a paper presented to the 11th annual
China Development Forum, sponsored by the Development Research Center of the
State Council PRC, held in Beijing on March 2022 2010.
Stephen S. Roach, Americas China Complex, American Review, May 2010.
Alan W. Wolff, China in the WTO, written testimony, hearing on Evaluating
Chinas Role in the World Trade Organization over the Past Decade, U.S.-China
Economic and Security Review Commission, June 9, 2010.
Alan W. Wolff, The Direction of Chinas Trade and Industrial Policies, written
testimony, hearing on Chinas Trade Policies, House Ways and Means Committee,
June 16, 2010.

The CHAIRMAN. Thank you very much, Dr. Tyson.


Ambassador Hills.
STATEMENT OF HON. CARLA A. HILLS, FORMER U.S. TRADE
REPRESENTATIVE, CHAIRPERSON, NATIONAL COMMITTEE
ON U.S.-CHINA RELATIONS, WASHINGTON, DC

Ambassador HILLS. First of all, thank you very much, Mr. Chairman, Senator Lugar, and the other members of the committee. Its
a great pleasure to appear again before the Senate Foreign Relations Committee.
I think your focus on the economic issues is absolutely indispensable today. I have submitted testimony that responded to your
seven questions, and I just picked out three issues that I thought
I would summarize, since I was told 5 minutes was the limit. One
is trade, one is the imbalance, and, last, the Strategic and Economic Dialogue. And I look forward to your questions.
Our Secretary of State has stated, not once but several times,
that our relationship with China is the most important bilateral relationship in the world in this century. And in the area of trade,
I would say that is already evident.
Between 2000, the year before China entered the World Trade
Organization, and 2008, just before the great recession, United
States sales to China increased 340 percent; whereas, during that
same period, our sales to the rest of the world increased just 29
percent. And, significantly, every State in the Union has seen near
triple-digit growth of their sales to China. Even more significantly,
in my opinion, last year, when global trade plummeted 11 percent,
pulling global growth into negative territory, our exports to China
held steady, where our exports to the rest of the world fell by 20
percent.

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And, as Senator Lugar has pointed out, today China is our fastest growing export market, and has become our second-largest
export market, behind Canada. And we both benefit from keeping
our respective markets open and avoiding all forms of protection,
such as Buy America legislation and Buy China policies.
And it is in our mutual interest to work further to open global
markets. As Dr. Gary Hufbauer, of the Peterson Institute for International Economics, has calculated, the United States economy is
$1 trillion richer per year as a result of our leadership in opening
global markets since World War II, and, similarly, its thanks to
open markets that China has achieved double-digit growth for the
past three decades that has lifted hundreds of millions of people
out of dire poverty.
So, going forward, we should boost our global trade and with it
our respective nations growth by reaching agreement in the Doha
Round, and were more likely to achieve an agreement in those
negotiations if the United States and China work together.
In addition, while both of our economies are recovering from the
great recession, neither government can ignore the fact that the existing global imbalance risks triggering another serious financial
crisis. Indeed, the former chairman of the New York Fed has stated
that, even without the housing crisis here in the United States, the
global imbalance would have eventually led to the crisis that we
have suffered.
Now, China, Germany, Japan, South Korea, and others, have
built their growth on exports, accumulating substantial surplus,
whereas the United States, the United Kingdom, and Spain, and
others, have built their growth on consumption, accumulating substantial debt. Neither growth model is sustainable. And although
the United States has cut its external Federal debt from its 6-percent peak in 2006 to about 3 percent last year, it still remains the
worlds largest debtor nation. And although China has cut its current account surplus from its 11-percent peak in 2007 to about 5
percent in 2009, it still remains the worlds largest creditor nation.
And most thoughtful economists suggest that these declines,
while welcome, are driven more by cyclical factors than by structural factors. And its the structural factors that both nations and
their colleagues that find themselves in similar circumstance need
desperately to address.
To ensure that we do not suffer again from a financial crisis, the
global economy simply must be brought into better balance. And
this is a global problem. But, if the largest debtor nation and the
largest creditor nation were to lead by example and commit to specific structural reforms within realistic timeframes, with periodic
updates, that would not only give confidencegreat confidence, in
my viewto the global market, it would also put our respective
economies on a sustainable growth path and ensure the future
prosperity of our respective populations.
For example, the United States could commit to a plan at a G20
meetingwere having a G20 meeting in a couple of daysto bring
its primary budget deficit into balance within say 5 years, and its
external deficit into better balance in say 10 years, setting forth
benchmarks to measure its progress, which it would report at future G20 meetings.

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Similarly, China could commit to a plan at a G20 meeting to
stimulate its domestic consumption by gradually correcting the
underpricing of capital, water, land, and energy that favors its
state-owned enterprises and heavy industry, that export, and permitting interest rates to rise on bank deposits, making credit more
available to small- and medium-size enterprises, and further loosening the controls over its currency, and providing progress reports
in these areas in future G20 meetings.
And the Strategic and Economic Dialogue that was referred to in
your questions provides, in my view, an extremely valuable forum
for thinking through the tough issues, like rebalancing and protectionism. It brings together Cabinet-level officials on both sides to
discuss difficult challenges facing both nations, like the need for
further opening the global markets, stimulating innovation, addressing environmental issues, and resolving bilateral differences
over trade and investment. Its value could be enhanced by smaller
delegations: The last delegation coming from the United States
numbered 200, and there was an equal number on the Chinese
side; its tough to achieve a real personal relationship in a group
of 400. And more frequent meetings would facilitate the building
of the personal relationships, which I deem to be extraordinarily
important and key to building mutual trust.
Theres so much more that I could say, but I notice the clock is
blinking. And so, let me stop. And I am pleased to take your questions.
[The prepared statement of Ambassador Hills follows:]
PREPARED STATEMENT OF HON. CARLA A. HILLS, CHAIR AND CEO OF HILLS &
COMPANY, INTERNATIONAL CONSULTANTS, WASHINGTON, DC
Mr. Chairman and members of the committee, thank you for inviting me to share
with you my views regarding opportunities and challenges in the United StatesChina Economic Relationship. You have posed seven questions.
I. WHAT ARE THE KEY ISSUES FOR THE UNITED STATES AND CHINA POLICYMAKERS TO
CONSIDER REGARDING FAIR AND OPEN ACCESS TO EACH OTHERS MARKET?

1. Keeping Bilateral and Global Markets Open


The most important issue for leaders in the United States and in China to keep
firmly in mind is that their nations prosperity requires keeping bilateral and global
markets open. History shows that no country has done well by sealing itself off from
the world.
Economist Dr. Gary Hufbauer in a comprehensive study published by the Peterson Institute for International Economics calculates that the opening of global markets since World War II has increased our nations GDP by roughly $1 trillion per
year, thus raising the average American household yearly income by $9,500. He further calculates that the additional opening of world markets to trade and investment could increase U.S. wealth potentially by another $500 billion per year, making the average American household richer by an added $4,500 per year. It is hard
to think of another economic policy decision that could have such a positive impact
on U.S. economic well-being.
And it is thanks to the opening of global markets that China has averaged double
digit growth over the past three decades, enabling it to lift hundreds of millions of
people out of dire poverty. Today, China has become the worlds fastest growing
major economy. This year it is likely to replace Japan as the worlds second-largest
economy.
The benefits of open markets are enormous. The prosperity of the peoples of both
China and the United States will be enhanced by maintaining a strong and vibrant
economic relationship.
Yet economic hardship inevitably stokes economic nationalism. Last year for the
first time since World War II, global trade plummeted 11 percent and global output
fell into negative territory. Americans were hit by historic job losses, home fore-

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closures, and bankruptcies. China did not escape the crisis. It was forced to shutter
hundreds of assembly and manufacturing facilities putting millions of people out of
work.
Although the International Monetary Fund forecasts world output will grow by
more than 4 percent this year and global trade will increase by 7 percent, there is
considerable pain remaining. Policymakers in the United States and in China will
expedite the economic recovery that is now underway by resisting calls to impose
market barriers on the trade or investment of the other.
In spite of our different histories, form of governments, and domestic sensitivities,
an important fact for both Chinese and American policymakers to keep in mind is
the enormous potential for extremely positive interaction between the largest and
the fastest growing economies.
2. Rebalancing Our Economies
While both of our economies are recovering, our policymakers cannot ignore the
fact that the imbalance that exists in our respective economies could trigger another
crisis. In the last half decade China has become the worlds largest creditor nation,
and the United States its largest debtor nation. Although China has cut its surplus
from its peak in 2007 of 11 percent of its GDP to about 5 percent in 2009 and 3.5
percent in the first quarter of 2010, and the United States external federal deficit
has come down about from its peak in 2006 of 6 percent of GDP to 2.8 percent in
2009, thoughtful economists who have studied this issue believe that both declines
were largely driven by cyclical factors and that structural changes are still required
if we are to protect against future global financial crises.
The United States will need to reduce both its primary budget deficit and its external deficit. China will need to reduce its reliance on exports and heavy industry.
Although the action that each government takes to restructure its economy is independent of the other, it is an issue that both policymakers must address.
II. WHAT POTENTIAL DOES THE CHINESE MARKET HOLD FOR U.S. COMPANIES?

The actual and potential of the Chinese market is substantial and growing. China
has become Americas third-largest export market behind Canada and Mexico and
is our fastest growing export market. Between 2000, the year before China joined
the World Trade Organization (WTO) and 2008, U.S. sales to China increased 340
percent whereas U.S. sales over that same period to the rest of the world increased
just 29 percent.
Importantly, virtually every state in the union has seen near triple digit increases
in its sales to China. Last year computers and electronics, crop production, chemicals and transportation equipment comprised our top four exports to China. These
are all sectors that generate good domestic jobs.
And in 2009 when for the first time since WWII trade plummeted 11 percent
dragging world growth into negative territory, U.S. exports to China held steady
whereas U.S. exports to the rest of the world fell nearly 20 percent. This year
through April, U.S. exports to China are up 42 percent and are 17 percent higher
than the comparable period in 2008.
It is not surprising that U.S. companies continue to seek to do business in and
with China. In 2009 in spite of the economic crisis that adversely affected both
China and the United States, the value of U.S. goods exported to China was about
$70 billion roughly the same amount as before the crisis, and if sales of U.S. goods
to Hong Kong are added, the total climbs past $90 billion. In addition, U.S. exports
of services to China topped $15 billion. And sales of U.S. affiliates in China topped
$84 billion in 2007 before the crisis and the latest year for these statistics. In short,
the U.S. current market in China exceeds $100 billion and that market is steadily
growing.
III. WHAT ARE THE CHIEF OBSTACLES THAT U.S. COMPANIES FACE IN CHINA?

Foreign companies face a number of obstacles in doing business in China. There


are voices in the Chinese leadership, as there are here in the United States and
elsewhere, urging the adoption of restrictive measures to protect specific interests
of domestic businesses. Measures in China that have been particularly nettlesome
to U.S. companies include:
1. Government Procurement: Indigenous Innovation Policy
In 2006, China, in an effort to produce national champions, adopted an Indigenous Innovation policy that sought to encourage government purchases of domestic
products in specific sectors. Last year the government produced lists of favored products. As a result of bilateral dialogues, the government has moved from mandating
domestic purchases to encouraging them. However this buy China policy is a

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major concern to U.S. entrepreneurs, particularly those in the high technology
sectors.
2. Protection of Intellectual Property
According to a survey conducted by the United States-China Business Council,
two-thirds of U.S. companies found Chinas failure to protect adequately intellectual
property adversely affected their businesses in China. Getting the legal structure
right is important. In 2009, the United States brought and won a case in the WTO
dealing with copyright infringement which resulted in China amending its laws.
However, enforcement is a major problem at the central, provincial and local levels.
3. Standards and Testing
U.S. companies are adversely impacted by standards that are drafted to favor Chinese domestic products. For example, an ingredient that is harmless may be prohibited in a particular product when that ingredient is not used in competing Chinese
products.
U.S. companies find Chinas testing process challenging. A Chinese certification
board is responsible for testing most products sold in China. That top-down approach is different from the process used in the United States where industry develops the product standards in the first instance.
4. Investment Restrictions
A United States-China Business Council survey of its member companies doing
business in China indicates that roughly 90 percent of its member companies invest
in China to reach the market there, not to export back to the United States. Although some sectors are open, others including chemicals, automobiles, telecommunications and express delivery encounter some restrictions. China is in the
process of revising its 2007 Catalogue Guiding Foreign Investment in Industry.
IV. HOW CAN THE UNITED STATES BEST STRENGTHEN ITS TRADE AND INVESTMENT TIES
WHILE ENSURING U.S. COMPETITIVENESS IN AN INCREASINGLY COMPETITIVE ENVIRONMENT?

Our Nation can strengthen its trade and investment ties with the trading nations
of the world including China in a number of ways including (1) leading the 153
members of the World Trade Organization (WTO) to a successful conclusion of the
Doha Round of Multilateral Negotiations; (2) expanding efforts to open markets with
the 21 economies comprising the Asia Pacific Economic Cooperation forum (APEC)
starting with completing the Trans-Pacific Partnership; (3) approving the three
pending free trade agreements that have been signed with South Korea, Colombia,
and Panama; (4) completing the negotiation of a Bilateral Investment Treaty with
China; and (5) addressing our restrictions on immigration that reduce our competitiveness.
1. Doha
For six decades the United States under both Democratic and Republican administrations led the world in opening global markets to trade and investment with the
result that economic growth both globally and nationally soared for rich and poor
nations alike. Our actions in the early multilateral negotiations under the General
Agreement on Tariffs and Trade (GATT) accelerated the economic rebuilding of nations devastated by World War II. Today we could be equally far sighted by achieving an agreement in the Doha Round of Multilateral Negotiations that would integrate developing nations more solidly into the global trade regime and in so doing
enlarge trade and investment opportunities that would fuel economic growth at
home and around the world. Unfortunately, we are no longer leading efforts to open
global markets.
Currently in its ranking of 133 trading nations, the World Economic Forum ranks
the United States behind 43 nations in terms of how open the domestic market is
to trade. However, the Doha Round offers our Nation an outstanding opportunity
to do well by doing good. One example stands out. By agreeing to reduce meaningfully our agricultural subsidies, we could persuade other governments with high
subsidies to do the same. Opening global agricultural markets would not only benefit our farm exporters, but it would show the world that we are serious about taking steps to put our Nation on more a more sustainable fiscal path.
2. APEC and TPP
Expanding our trade and investment ties in Asia offers the United States a significant opportunity to stimulate domestic economic growth and job creation. The 21
members of the Asia Pacific Economic Cooperation forum (APEC) represent approximately 2.5 billion consumers, 58 percent of global trade, and more than half of world

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output. Over the past decade most of the increase in global growth has been generated by the APEC economies. Collectively these economies account for a majority
of our Nations exports. Further opening these markets to U.S. entrepreneurs would
enhance our Nations competitiveness in the worlds most vibrant region where
other major trading nations including China, Japan, South Korea, the European
Union and the economies comprising the Association of Southeast Asian Nations
(ASEAN) have negotiated or are currently negotiating bilateral and plurilateral
trade agreements that advantage their entrepreneurs over ours. Obtaining equal or
better access to these markets would enhance our Nations competitiveness, create
jobs, and boost growth.
Achieving this will require leadership and action on our part. To strengthen our
trade and investment ties in this high-growth region, we should move forward
promptly to negotiate the Trans-Pacific Partnership (TPP),1 which could serve as a
first step toward a broad market opening agreement in the region which over time
could incorporate additional APEC members, such as Japan, South Korea, Indonesia, Malaysia, and eventually China. Such an agreement would not only enhance
our Nations competitive position, it would also create a visible bond across the Pacific to work against the world splintering into three blocs (Asia, Europe, and the
Americas) which would both impede global and national economic growth and increase the potential for global instability. The APEC summit in Hawaii in 2011
gives the United States an excellent opportunity to showcase a completed TPP,
which would demonstrate its renewed commitment to the region.
3. Approval of Pending Free Trade Agreements
A. Korea Free Trade Agreement
Approval of the Korean Free Trade Agreement would both enhance our competitiveness in Asia and demonstrate our continued interest in the region. Under its
terms South Korea, currently our seventh-largest trading partner, would open its
market to U.S. farm products, goods, and services, enhance its protection of intellectual property and substantially open government procurement. Ninety-five percent
of bilateral trade in consumer and industrial products would become duty free within 3 years. The agreement would cause trade to expand between our two nations
and stimulate both economic growth and jobs in both markets and put our entrepreneurs on an equal footing with the growing list of major trading nations that
have already negotiated trade agreements with South Korea.2 Significantly, it has
indicated an interest in negotiating a trade agreement with China, which if concluded, would put our exporters at a substantial disadvantage in one of our key export markets.
B. Colombia and Panama Free Trade Agreements
Approval of the trade agreements that the United States has signed but not ratified with Colombia and Panama would substantially enhance our competitiveness
in Latin America. Colombia with its $250 billion economy is the second-largest in
South America. Today in excess of 90 percent of U.S. imports from Colombia enter
the United States duty free while relatively high tariffs are imposed on most U.S.
exports. The agreement would eliminate 80 percent of those tariffs and open up
markets to a broad range of services and investment. That would make exports
more competitive and remove the additional disadvantage our exporters face not
only by leveling the playing field between the two countries but also by achieving
equality with Colombias other trading partners like Canada that have already entered a free trade agreement with Colombia.
Similarly opening Panamas market would make our goods, services, and investment more competitive. It makes no sense for us to be the impediment that enables
Panama to ship its products duty free and to assess duties on our services and goods
including our competitive heavy equipment used for canal upgrades when much of
our competition ships duty free.
4. Bilateral Investment Treaty With China
As economist Dr. Hufbauer has ably documented U.S. outward foreign investment
pulls U.S. exports into the foreign market, while inward foreign investment into the
United States boosts economic growth and creates domestic jobs. To establish clear
rules governing inward investment gives certainty to the market and confidence to
1 Currently involving Australia, Brunei, Chile, New Zealand, Peru, Singapore, the United
States and Vietnam.
2 Korea currently has five free trade agreements in effect, two that are signed and pending
ratification, negotiations underway with eight other countries and is considering entering negotiations with six more.

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investors, plus it helps to avoid controversy. In June 2008 at the fourth Strategic
Economic Dialogue, China and the United States agreed to begin negotiations of a
bilateral investment treaty to protect the interests of their respective investors in
the others economy. Such an agreement would protect our investors against discriminatory measures that today account for a major portion of the obstacles that
confront our businesses in China. With economic nationalism on the rise in both
countries, moving ahead to conclude an investment treaty would enhance U.S. competitiveness by insuring that we can capture the growth and jobs that attend cross
border investment.
5. Immigration Contributes to U.S. Competitiveness
We usually talk of trade ties in terms of goods, services, and investment and less
frequently mention people and ideas. Yet the United States is a nation of immigrants. Talented people from all over the world come to work or study in the United
States bringing their ideas, starting businesses, creating jobs and contributing to
our competitiveness. According to a study published in 2008 by the Small Business
Administration,3 immigrants constitute 12.5 percent of U.S. businessowners and
start 25 percent of new engineering and technology companies. Another study published in 2009 by the American Electronics Association,4 found that immigrants
were CEOs or lead technologists in one of four technology and engineering companies started in the United States between 1995 and 2005. These immigrant-founded
companies employed 450,000 workers and generated $52 billion in revenues in 2006.
Unfortunately for our economic growth, creation of new jobs, and overall competitiveness the annual number of H1B visas is sharply restricted. Current law limits
H1B visas to 65,000 annually with up to 20,000 available for foreign nationals
holding advanced degrees from an American university. America could boost its
growth, job creation, and competitiveness by opening its doors more widely to talent
from beyond its border.
V. THE STRATEGIC AND ECONOMIC DIALOGUE IS OUR BILATERAL FORUM FOR ENGAGEMENT ON MANY OF THESE ISSUES. HOW WOULD YOU RATE THE EFFECTIVENESS ON
THESE ISSUES?

I believe that the Strategic and Economic Dialogue is an important bilateral


forum that can help our government to build a solid relationship with the worlds
fastest growing economy. It provides the opportunity for our leaders at the highest
level to meet their counterparts and discuss critical issues. These discussions can
enhance our understanding of Chinas economic challenges as well as its strategic
objectives and ensure that Chinas leaders understand ours. Mutual understanding
is indispensable to finding solutions to tough issues. The list of economic issues that
require collaboration for proper resolution is long and growing including rebalancing
our national and the global economies, energy security, trade policy, financial reform, and environmental protection. To address effectively these and other issues,
it is overwhelmingly in our national interest to maintain a close, candid, and collaborative relationship at the highest levels, and the Strategic and Economic Dialogues help to do just that.
We know that high-level engagement works. In recent years our Deputy Secretary
of State met frequently to discuss issues of foreign policy. In addition our Secretary
of the Treasury led the effort called the Strategic Economic Dialogue (SED) whereby
Cabinet-level officials from both governments met to discuss economic issues for 2
days twice a year. The purpose of the SED was to discuss complex, longstanding,
economic challenges and to craft solutions satisfactory to both governments.
Since both our governments are quite compartmentalized and have different organizational structures, these meetings helped to circumvent the stovepipe structures
that impede decisions by bringing to the table all the high-level officials on both
sides required for a decision.
These face-to-face meetings enabled both sides to understand the concerns of their
counterparts and led to a number of positive outcomes. For example in 2007 when
food and safety issues were very much in the news, high-level officials from both
governments seriously discussed at an SED meeting effective ways to deal with
these issues.
At the next meeting of the SED, representatives of our Food and Drug Administration and our Consumer Products Safety Commission and their Chinese counter3 Robert W. Fairlie Estimating the Contribution of Immigrant Business Owners to the U.S.
Economy, Small Business Administration Office of Advocacy, November 2008, http://
www.sha.gov/advo/research/rs334tot.pdf.
4 Workforce & Immigration Overview: Maintaining a High-Skilled U.S. Technology Workforce, 2009, http://www.acanet.org/GovernmentAffairs/gaetl1BlHIBVisa.asp.

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parts were able to announce a Memorandum of Understanding covering how they
would cooperate in food and safety investigations. Representatives of our FDA have
publicly stated that they had never before enjoyed such a high level of positive interaction with their counterparts in China. They have established offices in Beijing,
Guangzhou, and Shanghai.
More recently at the S&ED meeting this past May, after discussion the Chinese
Government agreed to submit a proposal to join the WTO Government Procurement
Agreement by the end of July. Such an agreement would protect our entrepreneurs
against some of the discrimination that they name as the top obstacle they encounter today in penetrating the Chinese market.
The economic dialogues not only provided an effective forum for raising and solving economic issues of concern to both our governments, but they also created a
mechanism that avoids having to initiate talks among strangers in the heat of a
crisis.
Accordingly I was very pleased when it was announced that our Secretaries of
State and Treasury would share leadership of a high-level bilateral dialogue, now
called the Strategic and Economic Dialogue. The S&ED first met in July last year
and again last month for 2 days on each occasion. The plan is to hold these meetings on an annual basis dedicating one day to a plenary session and the second day
to separate discussions on economic and strategic issues.
The one downside that I see in the new structure is its sheer size. In May our
delegation to Beijing comprised 200 senior officials, the largest U.S. delegation to
China in the history of our bilateral relationship. The merged strategic and the economic groups bring together such a large number of participants that relationshipbuilding that has been so helpful in the past will be far more difficult.
Another downside I see is that the stated intention is to meet yearly rather than
twice each year. Formerly, two full days twice a year, four days total, were devoted
to economic discussions. Now only one day each year will be devoted exclusively to
economic issues. Our bilateral economic agenda is long and growing longer which
suggests to me the need for more rather than fewer meetings.
There are two other bilateral dialogues that provide valuable means to have sustained focus on critical economic issues, but they are not conducted at the same high
level. One is the Joint Commission on Commerce and Trade, a senior officials group
that has formed some 17 working groups to address specific issues including industrial and competition policy, intellectual property, information technology, and trade
and industry. Most of these plan to meet twice a year.
The second is the United States-China Investment Forum, a deputies led group
that is focused on such issues as procurement, standards, and access to markets for
services.
VI. CAN WE MAXIMIZE OUR ABILITY TO ADDRESS CONCERNS ABOUT CERTAIN CHINESE
ECONOMIC POLICIES THROUGH MULTILATERAL FORA SUCH AS THE G20?

The G20 group of nations representing the worlds 20 largest economies which has
replaced the G8 representing the eight large industrialized nations is far better
equipped to deal with todays global economic challenges.
Three issues of key importance to both the United States and China are better
suited to the G20 forum than bilateral discussion: (1) Chinas currency regime; (2)
the need to rebalance the global economy; and (3) the need to keep global markets
open in the face of domestic calls for protectionism.
I. Chinas Currency Regime
Chinas currency controls have been an issue of contention not only with the
United States, but also with the European Union, which is Chinas largest trading
partner, as well as a number of other nations. Chinas announcement a few days
ago that it will permit the yuan to gradually appreciate will help to reduce those
tensions. Monitoring this issue at future G20 meetings will be helpful in that it will
maximize pressure on China which wants to be seen as constructive in international
fora and minimizes bilateral contention.
2. Rebalancing the Global Economy
The global recovery that is currently underway, faster for some than for others,
could be derailed by the serious imbalance of the global economy that has ballooned
in recent years. China, Germany, Japan, South Korea, and other Asian economies
have built their growth on exports, whereas the United States, the United Kingdom,
and Spain among others have relied excessively on domestic consumption, particularly in the housing sector, to fuel economic growth.
Although investment excesses by the financial sector triggered the fiscal crisis in
2008, there is general agreement that the global imbalance made the crisis much

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worse. As stated last year by Gerald Corrigan, former President of the New York
Federal Reserve: It is highly likely that these imbalances would create a serious
macroeconomic problem even if we had not had the fiscal problem.
If we are to protect against future global financial crises, the global economy must
be brought into better balance. That will require debtor and creditor nations to alter
their existing economic models to put their economies on a more sustainable growth
plan. Debtor nations cannot continue to consume at the excessive levels of the past,
and creditor nations must look more to their own consumers to fuel their economic
growth.
This is a global problem and requires a global solution. However, global balance
is more likely to be restored if the worlds largest debtor nation and its largest creditor nation were to lead by example with each committing to specific structural reforms, spelling out the steps that each would take within specific timeframes, and
agreeing to provide periodic updates regarding progress. That would boost confidence in the future health and stability of the global market, which in turn would
help keep our respective domestic economies on a sustainable growth path.
The required changes will take time to implement. But a plan of action over a
period of years could be announced that would give confidence to the market and
to investors. One could imagine the United States announcing a plan at a G20 meeting to bring its primary budget deficit into balance within a specified period like
5 years and its external deficit into balance in a specified period like 10 years and
to report regularly at future G20 meetings on its progress.
Similarly, one could imagine China announcing at a G20 meeting a plan to stimulate its domestic consumption by correcting its underpricing of capital, water, land,
and energy to large enterprises, permitting interest rates to rise on bank deposits,
making credit more available to small- and medium-size businesses, and continuing
the steady and gradual loosening of controls on the yuan that it announced this past
weekend with progress reports on these structural changes at future G20 meetings.
Such a commitment by the United States to undertake structural reform necessary to achieve more balanced growth would not be a favor granted to nor conditioned on action by China, nor would a decision by China to make structural
changes to stimulate domestic consumption be a favor granted to or conditioned on
action by the United States.
The policy corrections that each needs to make are necessary to ensure each nations future financial stability and prosperity, for if corrections are not made the
global imbalance will likely ignite another economic crisis. By their respective actions, they would not only give confidence to the market but also help persuade
other nations with imbalances to follow their lead. The G20 provides an appropriate
forum.
3. Keeping Global Markets Open
Leaders of the G20 nations which account for 85 percent of world output and 80
percent of world trade have taken a leadership role with respect to the global economy. They meet biannually to consult and collaborate on critical global economic
issues.
The G20 leaders instead of simply pledging support could take action and make
history by bringing the Doha Round to a successful conclusion. Economic studies
document that the reductions in trade barriers that could be secured in this round
of trade talks would boost world output between $300 billion and $700 billion a
year. We need that growth now.
VII. WHAT ARE YOUR BROAD VIEWS ON THE IMPORTANCE OF THE ECONOMIC
RELATIONSHIP AS PART OF A LARGER FOREIGN POLICY AGENDA?

There is no question but that a collaborative, constructive economic relationship


creates a positive environment for discussing tough and contentious foreign policy
issues. Even where national interests on foreign challenges diverge, a solid economic
relationship makes serious discussion of and possible narrowing of those differences
more likely.
That does not mean that we should forgo pressing our economic interests. From
time to time we will have economic differences with our large and important trading
partners, including China. When we believe that China or any trading partner has
violated recognized rules of the WTO, or the rules of other international agreements,
we should act and use the dispute settlement mechanisms provided to resolve the
problem. And where the rules of the system are insufficient, we should negotiate
to ensure that they reflect market realities.
Our government has taken China to the WTO eight times. We have settled four
of the cases, won three and have one pending. China has brought five cases against
us. We have settled one, won two, and lost two.

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This is how the WTO trade regime should work. It enables us to resolve trade
issues under mutually agreed transparent rules minimizing friction.
CONCLUSION

Managing United States-China relations presents challenges but also very substantial opportunities. Many in America ask: Can the worlds largest and fastest
growing economies constructively work together to enhance our future prosperity
and stability? Or have the differences between our increasingly competitive economies along with those differences in our histories, forms of government, and domestic sensitivities become too great to enable us to harness our respective strengths
to deal effectively with todays bilateral and global challenges?
My answer is that we can, should, and must work constructively together. Most
importantly, I believe that by doing so we can build habits of cooperation that will
help us deal effectively with new challenges as they arise which will not only enhance the well-being of the people of the United States and of China but will contribute meaningfully to global peace and stability.

The CHAIRMAN. Well, Ambassador Hills, Dr. Tyson, thank you


very much. Youve put a lot of food for thought on the table, and
I want to pick up in a few places right away.
Ambassador, you just mentioned that Chinas open markets have
resulted in the double-digit growth. A lot of people would argue
about how open that market really is; sort of a one-way street, in
some peoples opinion.
I was over there recently, meeting with a bunch of our companies, all of whom complained about the Chinese Government bidding process and procurement process, and how really impossible
it was for them. You know, theyd bid, theyd do well, but they
never got chosen. It was always a domestic company or a majorityowned company. Its always, you know, China-centric.
Now, that works very effectively for them, obviously. And with
the kind of growth that theyve had and the opportunities theyve
had, a lot of people are willing to, you know, put their money down
and go for it.
But, its not creating the kind ofI mean, the single biggest
effect on this question of the current accounts deficiton our current accounts deficit while weve gone up the 300 percent as youve
mentioned, its nowhere near where it ought to be, nor is their consumption commitment where it ought to be.
So, I mean given the clear penchant for the Chinese to kind of
do what they want, when they want, which is what theyve done
on the renminbi, the reevaluationway late, not enough, in some
peoples viewso, its sort of an incremental deal, which wont have
the kind of impact it ought to.
So, help us understand, if you would, is there any leverage? Do
you have any leverage with your bankeryour biggest banker? Do
we have any ability to do anything except ask and hope?
Ambassador HILLS. Well, first of all
The CHAIRMAN. Its not a new topic. Weve been going through
this through several administrations, and its not getting better, its
getting worse.
Ambassador HILLS. Mr. Chairman, I would say that our trade
with China over the last decade has soared. The figures that I gave
you, of a 340-percent increase and China becoming this year our
second-largest export market, is really remarkable for a country
that, in 1978, was a Communist country, sealed off from the rest
of the world. Its remarkable progress in three decades.

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And if you look at where our trade deficit has gone, in 1998 the
composition of our trade deficitit was 75 percent in East Asia;
today, it is 49 percent in East Asia and 51 percent with the rest
of the world. And when I say East Asia, of course, I include
China.
The CHAIRMAN. Can I just ask you a question, interspersed
there? Is that because youre sort of heralding the upside? You can
look at it and see the glass, you know, in different ways, here. But,
is the upside of that because China has so successfully brought so
many people in from the agricultural sector, into an urbanized and
production role, that theyre ablethat it sort of suits their interests, its in their interest to have the particular products come in
that come in, but theyre still highly selective about what that is,
and how much? Even though its gone up significantly, were still
at an enormous deficit, in terms of our overall debt relationship,
and way behind where we could be, in terms of boosting our own
economy and kicking the entire global economy into gear.
Ambassador HILLS. Mr. Chairman, I was trying to answer the
question you posed regarding the degree of openness in the China
market. And the fact that our deficit with East Asia has declined
with China being part of it suggests that its been opened. It also
accounts for the amount of trade that China has invited in.
One of the reasons why our deficit has shifted from East Asia
being so large a part, down, is because China has invited in Japan,
Taiwan, Singapore, South Korea, and they are producing products
in China. Many of the products produced in China are made in
China, but not by China. When you buy an iPod, it comes to our
shore at a cost of about $150, and $4 of that value is Chinese,
which is based upon snapping together component parts from
Japan, South Korea, and the United States.
But having said that, the Chinese market is quite open by Asian
standards. Theyre not as open as the United States. Their average
tariff is about 9 percent, versus ours, at about 3. And we want to
continue to work with them to open their market. Theyre far more
open than India, theyre far more open than Indonesia, but theyre
not as open as the United States, which has been working on this
since World War II.
And youre absolutely right; there are some very tough restrictions. I listed them in my testimony. Industrial policies and restrictions in the form of threatened compulsory licensing, preferences
for domestic products, subsidies for domestic production are real
problems. We lump these restrictions together as Indigenous Innovation. These policies are of growing concern to our companies.
Our Buy America is an irritant to the Chinese. We have issues that
we should sit down and talk about. And I think that, when we do,
it does help to make progress.
And we also have the G20, which, as Laura Tyson has suggested,
is a good forum when others share our concern. For example, on
the revaluing of the currency, Europe, as well as we, believes that
the currency is undervalued, to the detriment of their exports. By
having a wider group of nations object to or encourage change in
certain of Chinas restrictive policies, is helpful, for China wants to
be on the international stage, and it wants to be respected. And so,
it has made a number of changes, which are very much in its own

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interest, for example, to control inflation and to increase consumption through expenditures on social programs.
The CHAIRMAN. Well, let me ask you both, quickly, if I canmy
times up, but I wanted to get this question on the table, quickly.
And, Dr. Tyson, maybe you begin.
To what degree is this economic surge by China activating, in
your judgmentweve had a lot of focus on the economic side of
thisa more assertive foreign policy, perhaps the rapid military
modernization, and to what end, and mercantilist economic policy,
to some degree?
Dr. Tyson.
Dr. TYSON. OK. I dont really feel that Im an expert on their
military policy. And I do think that, in areas that are trade-related
and economic-relatedand that can include aid policies to the rest
of the world, the organization structure of multilateral institutions,
and right down to a particular bilateral trade dispute on indigenous innovation, the Chinese are becoming more assertive.
Its not just because they have done so well, but also because,
frankly, the U.S. economy has stumbled badly, and, I think, around
the world, the recognition that we have stumbled badly leads our
trading partners to be more assertive in their relations with us. I
think we have to look, therefore, to ourselves, of what we are going
to do to restore our own economy on a very strong growth path,
sound fiscal policy, going forward.
On the issueI just will say one thing where I think maybe Ambassador Hills and I have somewhat of a disagreementI certainly
agree, on the import side, looking at our imports from Chinaits
really important to understand that much of what we import from
China we would have imported from other places, and its moved
to China to be put together and sold to us. And the Chinese rightly
point out, all the time, that the value of their exports to us, or our
imports from them on average, 25 percent of that value is Chinesevalue-added, its stuff theyve imported. And if we were to slap significant tariffs on those products, the production would shift gradually out of China, but it wouldnt come back here. It wouldnt come
back here. So, weI think we have to be very cognizant of what
why that import imbalance looks the way it is.
On the export side, however, I think the Chinese are moving in
ways which I think deserve our attention. They are committed to
becoming a technologically innovative nation. They want to move
from a labor-intensive, low-value-added industry structure to a
high-value-added technology structure. And thats where the indigenous innovation policy comes from, and preferential government
procurement, and standards. The Chinese want to develop their
own standard for things where there are global standards already
that are perfectly acceptable. And when you sort of look at them
doing this, you say, This looks like it could be in violation of their
agreement on standards at the WTO. Youre not supposed to create standards for the purpose of affecting trade flows.
So, these are really tough issues, because theyre nontariff barriers. And the protections in the WTO either dont exist, in some
case, or theyre inadequate; its very hard to bring a case, and win.
I think the United States, therefore, really has to engage the
Chinese on these issues directly. And, by the way, I think the con-

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cern of the American business community, which Ive also picked
up, has actually been extremely helpful, because the U.S. Government now is taking a much tougher position on these things. The
Chinese for a very long time, were very open to these companies.
These major American companies that have become a major part
of their economyare now saying, Were not being treated appropriately or fairly. That becomes a very powerful, I think, lever for
trying to get some negotiating progress on these issues with China.
So, I think theyve become more important, and I think we
should focus on them at the top of our list of priorities.
The CHAIRMAN. Senator Lugar.
Senator LUGAR. Ambassador Hills, your written testimony notes
that, Immigrant-founded companies employed 450,000 workers
and generated $52 billion in revenues in 2006. Now, recently, with
Senator Kerry, I introduced the Startup Visa Act of 2010, to allow
an immigrant entrepreneur to receive a 2-year visa if he or she can
show that a qualified U.S. investor is willing to dedicate a significant sum, a minimum of $250,000, for the immigrants startup
venture.
What do you expect the impact of such legislation to be? Is it at
the right levels? And, second, leaving aside the visa aspect, is it
likely that Chinese companies will simply make much larger
investments now in our economy? I read that, for example, theyve
noted that, as the labor costs have risen in China, it makes more
sense to produce the goods and services in the United States.
On these issues, can you give us some additional comment?
Ambassador HILLS. Let me say that my comment about the immigration and the need to open our nation to bright minds and to
the development of new technology is in response to the question
of enhancing our competitiveness. The statistics that we have in
the Department of Commerce and Small Business Administration
document the high number of startups created by foreign-born, the
substantial amount of jobs they create, and the substantial amount
of growth that they contribute to our economy. So, I support your
Start Up Visa Act. I believe that 65,000 H1B Visas for a country
of over 300 million people is extraordinarily limited, plus it is very,
very difficult and time-consuming to get a H1B visas for people
who want to come to the United States. Its also very difficult for
a student to come here to study. A student can be accepted at one
of our major universities, and not be permitted to come to the
United States, or, after graduating, cannot be permitted to stay.
Were just cutting ourselves off from talent and new ideas.
I was in China last week, and I addressed the issue of indigenous
innovation, and I said, Youre hurting yourself by turning inward.
When you keep out an idea, an invention, a patent, because you
prefer to have it made at home, you hurt yourself not only for the
loss of the idea or invention but also, because you create a monopoly protected from competition has little incentive to innovate. That
protected company is not going to expend money to become more
competitive or move up the value chain. But if you were to let all
the ideas, inventions, patents come in without government interference; it would stimulate ideas in your domestic market. So,
youre hurting yourself.

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I think theres a deal here to be made that benefits both sides.
In exchange for a relaxation of our export controls, China could set
aside those domestic industrial policies often grouped under the
name indigenous innovation. And I truly believe that.
On the investment side, I believe that Chinese companies are
thinking more and more of investing abroad. We need to take care
that we do not discriminate. And we see, particularly in the south
of our country, there are some small investments from the Chinese.
But, they express concern, having tried to invest in some larger
segments and not fully understanding CFIUSCommittee on Foreign Investment in the United Statesthat operates pursuant to
section 721 of the Defense Production Act of 1950, as amended, and
the regulations that we havethat it is difficult to invest here. And
they read our press, and they believe that their investors will be
discriminated against, that they are not thought well of in our
country. I think thats untrue. I think that most Americans think
very well of the Chinese, applaud their miraculous rise from dire
poverty to where they are today. And, although Chinas GDP on a
per capita basis is only about one-tenth the size of ours while their
GDP is roughly one-third of ours, they continue to make rapid
progress. Still China has a number of challengese.g., environmental, demographic, and growing income disparitybut it is making progress.
Senator LUGAR. So, I gather that your sense is, essentially there
are a good number of Chinese who are prepared to come to the
United States and make investmentsthat is, personally locate
themselves hereif our visa situation was friendlier. And with regard to investment in the United States, if our investment climate
was perceived as more friendly, these investments would come.
Therefore, at least some of us might argue that, in terms of creating more American jobs now and having more capital in the
country, our diplomacy really needs an uptick so that there is a different set of perceptions.
Ambassador HILLS. I would agree with you entirely. I think we
ought to open our market to foreign investment. If someone wants
to invest a dollar or an RMB in our market, and create jobs and
good products, thats to our benefit.
Senator LUGAR. Let me ask Dr. Tyson this question, that, in your
written testimony, you note a significant appreciation of the RMB,
relative to the dollar, will not have a significant effect on U.S.
trade deficit or on U.S. employment.
Dr. TYSON. Right.
Senator LUGAR. But, what measures, if any, vis-a-vis China,
would have a real impact on the trade deficit or the unemployment
rate?
Dr. TYSON. So, what I was trying to say in that observation was
that, basically, what matters to the overall U.S. trade imbalance is
not the relationship with any one country. That was the first point.
The second point is the point that I mentioned earlier. I think
a significanta dramatic overnight appreciation of the renminbi,
versus the dollar, would initially raise prices of a significant number of important imports to middle-class Americans, and a lot of it
would quickly leave China; it would go to different locations. It
wouldnt change our trade imbalance.

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So, I tend to see our trade imbalance as not very sensitive to an
appreciation. Now, I know that Fred Bergstens numbers are if you
had an appreciation, I think, of 20 percent over a 5-year period,
youd get a million U.S. jobs and a reduction of the U.S. trade deficit of $150 billion. The problem with that statement is that we had
something like a 20-percent appreciation of the RMB between 2005
and 2008, and this was the period when the U.S. trade deficit was
going through the roof, and when the U.S. current account imbalance hit a peak as a share of GDP.
So, I think the link between that currency value and the U.S.
trade imbalance is a very weak link, and I would prefer us to think
about the other factors that influence that.
I just want to add, because I completely agree, and you saw me
nodding my head, about the importance of inviting, or certainly not
in any way deterring, Chinese investment in the United States.
The Chinese have a massive amountthe largest holdings of
United States-dollar assets in the worldand they are looking for
ways to diversify those assets. They are worried about what the
value of those assets will be as the renminbi does climb, relative
to the dollar. Theyre worried about what happens to those assets
if we get a spike in U.S. interest rates. Theyre worried about inflation in the United States over the next 20 years. They would like
to diversify those assets.
They dont have a lot of options. The Euro has kind of disappeared as an option, so theyre not going to, I think, buy a lot
of gold and, you know, put it in a building.
I think they would like to diversify into other U.S. assets. And
we are either the first or the seconddepending upon, I suppose,
the monthlargest destination for foreign direct investment in the
world. Chinas the other one. We welcome foreign direct investment
from the rest of the world. We need to be sure we welcome it from
China, because it is a better way, frankly, to alleviate our trade imbalance with China because some of the stuff we buy from China,
imported, we will buy here.
And if you think about the history of the United States trade imbalance with Japan, when we had significant friction with them in
certain sectors, the Japanese moved production facilities here. And
today, they produce significant amounts of product, with significant
amounts of American-employed labor, using their technology, here.
So, yes, I think this is very important.
Senator LUGAR. Well, I thank you very much. I would just underline the thought that we really ought to be thinking in terms of
how we suggest to the Chinese they invest in our country
Dr. TYSON. Yes.
Senator LUGAR [continuing]. In addition to simply loaning us
money.
Dr. TYSON. Yes.
Senator LUGAR. Its a very different
Dr. TYSON. Exactly.
Senator LUGAR [continuing]. Concept, in terms of our own employment and our own economic growth.
Dr. TYSON. Yes.
Senator LUGAR. And I appreciate both of your answers.
Thank you.

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The CHAIRMAN. Thanks, Senator Lugar.
Senator Casey.
Senator CASEY. Dr. Tyson, thank you.
Dr. TYSON. Thank you.
Senator CASEY. Ambassador Hills, thank you so much for your
testimony.
I wanted to put my first question in the context of our current
economic climate. When I speak of Pennsylvania, I think its emblematic of a lot of places. We are, in our State, at about 9.1 percent unemployment, but thats 591,000 people, at last count
almost 600,000a big, big number. And although I think we are
in a recovery, weve got a long way to go.
One of the persistent, nagging, and most difficult challenges we
face is the problem of trade deficits. And weve got States like
Pennsylvania that are heavily exposed to, or impacted by, the trade
imbalance between the United States and China. Theres obviously
been a manufacturing component to that.
But, I guess recently the Alliance for American Manufacturing
reported that, contrary to some of the conventional wisdom, its not
simply, or only, manufacturing jobs, but high-technology jobs, as
well, that industry.
Another study, by the Economic Policy Institute, over a 7-year
period, in terms of what happened in Pennsylvania, a net job loss
of more than 95,000, due to the trade deficits with China.
So, all of that is predicate to a good deal of what youve already
spoken to. I know that, Dr. Tyson, you have a series of recommendations, starting at page 17 of your testimony. And I know
that, Ambassador Hills, youve got a series beginning on page 3
a series of obstacles that you set forth as the obstacles that our
companies face with regard to China.
Wheres theif you had toif you bumped into aon the street,
a constituent of mine in Pennsylvania, or a similarly situated
State, when they ask you, How do we bridge that gap, how do we
begin toat least begin to chip away at the problem?what are
the two or three strategic steps you think we have to take, in the
near term, to begin to put in place a strategy to get out of that
hole?
And Ieither one of you want to take a crack at it, or both?
Ambassador HILLS. When you talk about the imbalance that concerns your constituents, we obviously have to bring, not only our
bilateral, but our global imbalance into equilibrium. Thats going to
take both the United States along with other deficit nations and
China along with other surplus nations to alter their models of
growth. Those in deficit cannot point their finger at the surplus
nation and say, You are exporting too much. Nor can the surplus
nations point their finger at deficit nations and say you are consuming too much. Both groups need to change their growth models. It is true that China needs to stimulate its domestic consumption for its own national interests. It is also true that its currency
is somewhat undervalued, and appreciation would help to stimulate domestic consumption. But appreciation of the currency is not
a silver bullet. Currency is a factor. But, removing the distortions
in the factors of productionland, water, fuel, and financeare undoubtedly far more important factors in stimulating domestic con-

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sumption. Chinas growth model for the past three decades has
been built on growth generated by large state-owned enterprises
that export. And even the foreign investors that came in from
Japan and East Asia also were primarily manufacturing and
assembling goods for export. And those exports go on the account
of China with the result that China has the largest trade surplus.
That is not sustainable. This must change. In China its creating
enormous environmental problems and is contributing to a wage
gap between rural and urban areas. When you take the five largest
of the heavy industry, they are responsible for most of the pollution. Heavy metal pollution destroys about 1,700 square miles of
productive farm land each year and contributes to the fact that
most of Chinas urban ground water is polluted. In addition China
is home to the most polluted cities in the world. In 2007 the World
Bank reported that 16 of the worlds most polluted cities are in
China. And so, for domestic reasons, China needs to change its
model of growth that up to now has been disproportionately based
on heavy industry and export. China has many challenges, including demographic challenges that theyre going to have to deal with.
And with 1.3 billion people, they can and need to stimulate domestic consumption to boost growth. That will help develop small and
medium industries and service providers. Moving to a growth
model that relies more on consumption will make the Chinese population much more satisfied, and make your constituents much less
anxious.
Now, at the same time, Im sure some anxiety in Pennsylvania
is connected to the fact that our deficitour primary budget deficithas grown to levels that frighten people, and our accumulated
external debt adds to their anxiety. And so, we also must change
our growth model. We can no longer rely disproportionately on
domestic consumption, both public and private, to fuel our economic growth. We must get control of our fiscal deficit and boost
private savings. And whether we adopt a pay-as-you-go program,
and really mean it, or some other fiscal discipline, we need to get
our fiscal house in order. That would provide, I think, substantial
assurance at home and abroad that the United States economy was
not going to have to go through a great recession in the next
decade.
So, theres a lot that both China and the United States have to
do.
Senator CASEY. Dr. Tyson.
Dr. TYSON. Youve asked a very hard question, because I dont
know, for example, the numbers of workers you announced that
lost their jobs. I dont know how many would have been to a movement of a production facility to China or an import from China. I
do know that.
Lets take whats going on right now. In the last year, weve seen,
particularly the last 6 months, quite strong growth in industrial
production in the United States. We have seen a quite strong export of manufactured goods in the United States to China and the
other emerging market economies. This has been associated with
no growth in employment in manufacturing in the United States.
That is not, therefore, a trade issue; that is a technology issue.
That is how the U.S. companies compete, globally, with building

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manufacturing products here, and ramping them up, which theyre
doing right now, without increases in employment, because the
technology has displaced the employment.
And one of our issues in the United States is, we have to be
clear, when employment numbers like that show up, what is it
thats the role of Chinas development strategy. It may actually be
not very important to the employment problem.
Another thing I would say
Senator CASEY. You mean attribution.
Dr. TYSON. Yes. But, I would find it very difficult to talk to such
a person, because, you know, first of all, I would have to understand. I mean, the second thing I would say isAmbassador Hills
mentioned that the Chinese encourage their enterprises through
low interest rate through subsidies. They encourage certain things.
They want to develop their economy in a certain way so they subsidize certain things.
What did we subsidize in the United States, heavily, that was
part of the crisis? Housing. We subsidize. We absolutely subsidize
residential construction in the United States. And a number of
workers25 percent, as far as I know, last countof the unemployed problem in the United States is construction workers, who
were very important to the boom that we created with our own
interest-rate subsidy policy in the United States.
We dont have subsidy policies to create industrial employment.
We dont believe in them. We dont do them. China does them.
China absolutely does them. And theyve built a very powerful
employment base in manufacturing.
So, I thinkand then, the last thing I would sayin looking at
Pennsylvanias trade imbalance, or any countryor any State
trade imbalanceat the end of the day, Im not sure what it would
look like in Pennsylvania, because there is a huge amount of products being bought in Pennsylvania in retail outlets that are primarily bought in China, and there is service employment in the
United States thats supported by those imports.
Now, this gets me to another problem in the United States. We
have a polarization of the workforce going on. Its very dramatic.
The unemployment rate is not highits high, but not that high
for people with a college education or higher. Its around 5 to 6 percent right now, in that range. The 15-percent unemployment rates
are for high-school, or less-than-high-school, educated workers. And
those middle-income manufacturing jobs, that used to be a way
through, for those people, to the middle class, dont exist anymore.
And I would say, not because of trade with China, but because
technology has displaced those jobs.
So, we have a huge educational challenge in the country, because
where the jobs are likely to grow in the future over the next 5
years are in college-educated and more. And right now were making it more difficult, in many respects. In many States the tuitions
for college education are going through the roof because of State
budget problems.
So, the Chinese, I would say, are restructuring their economy.
Theyre building infrastructure in the center and western regions.
Theyre introducing new social security policies that will reduce the

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household savings rate in China. Theyre doing real, structural
things that will change their growth strategy over time.
I dont think were doing those. And I dont think a path to credible deficit reduction, which we needIm not saying we dont need
itbut, that, by itself, is not a structural policy. Thats not a structural policy.
So, I think we have to worry about investments to make our
economy more productive and competitive, going forward. Those
have to be part of our strategy. Its not just a deficit-reduction
strategy.
Senator CASEY. I know were out of time.
Thank you.
The CHAIRMAN. Thank you.
Senator Shaheen.
And Ive been called to a 4 oclock meeting, so I apologize.
If youSenator Lugar will close it out. I dont know if he has an
additional round that he wants to ask.
But, Senator Shaheen and then Senator Lugar.
And I apologize. I thank the witnesses again.
Dr. TYSON. Thank you.
The CHAIRMAN. There will be questions
Dr. TYSON. Thank you for the
The CHAIRMAN [continuing]. For the record. I had some additional questions I wanted to ask you, and I know some other colleagues may want to submit them, so well leave the record open,
if you dont mind, until the end of the week.
Dr. TYSON. OK, thats fine. Thank you very much
Ambassador HILLS. Thank you.
Dr. TYSON [continuing]. For the opportunity.
The CHAIRMAN. Thanks.
Senator Shaheen.
Senator SHAHEEN. Thank you.
And thank you both for being here this afternoon.
I would really like to pursue the line of questioning that Senator
Casey started with. But, before I do that, I want to ask youyou
talkedDr. Tyson, you talked about the kinds of structural investments and changes we would need to make in this country in order
to address some of the challenges that the economy faces. I certainly agree with you, relative to the education and the importance
of making sure that a whole strata of people, who are not now getting higher education, need to get that, and the challenges that
that encompasses. But, what else do you have in mind when you
say that? And I know this is a little off-topic, but you just raised
my curiosity.
Dr. TYSON. Well, I personally think we have great innovative
strengths in the United States. We still have those. But, I think
we have to worry about the fact that we have not kept up our
science and engineering talent base. This obviously goes to Senator
Lugars question. This is a very specialized
Senator SHAHEEN. Right.
Dr. TYSON [continuing]. Talent base that we need to be able to
take the basic science support, which we have, and continue to convert it into very successful commercial applications. And I look
down the road, and I worry about the fact that there are actually

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projected shortages of this kind of talent in the near term. Were
not talking about 10 years out. Were talking about 5 years out. So,
I would put a whole host of things in education.
I personally think that as a transition strategy, but also as a
strategy to support competitiveness, going forward we really have
a major infrastructure agenda at hand.
And Im smiling because I just came from a lunch, where a number of people were talking about this. Its been well documented,
before the great recession, that the United States was spending significantly less than required to just keep up the infrastructure it
had, much less get to world quality standards.
So, if you think about ports and airports and high-speed trains
as things that promote competitiveness, theyre not just a pleasant
journeytheyre that, too. I think thats an area of investment
which has two characteristics. One, it actually becomes a way to
create jobs for these kinds of workers who were in another kind of
construction.
And, by the way, I would put energy efficiency investments here.
Ive been a big supporter of the idea of doing more to promote
households to take on energy efficient investments, because those
are, basically, residential improvements that require labor to do,
but they also achieve another goal.
So, some of the things I think we should be doing are in the infrastructure, energy efficiency, and broadly defined education area.
We need to say that were going to have a different strategy, too,
our future is going to look different, too.
Senator SHAHEEN. Thank you.
To go back to China, one of the concerns that I hear from New
Hampshire business folks who are thinking about exporting to
China is a concern that once their technologytheyre working on
a new generation of technology, whether its in solar panels or, you
know, Internet, or whateverWeb technology, whateverthat once
that technology gets to China, that its gone, as far as theyre concerned. And so, they get the benefit of the first round of exports
of whatever that is, but then its going to get duplicated in China,
and theyre going to lose their patented technology.
So, how do we address that? Is it through more action at the
WTO, or are there other ways in which we can better address
Chinas stealing proprietary technology?
Ambassador HILLS. When any nation fails to take measures to
protect our proprietary technology, we should take them to the
World Trade Organization. We have an agreement that covers intellectual property. It continues to be a problem in China, although
it is improving when compared to a decade or so ago.
China secured a number of patents last year. It moved way up
the scale. And when you have a domestic stake in having a system
that protects innovation, generally that causes most governments
to take a greater interest in developing and enforcing rules to protect intellectual property.
So, were finding that China is taking a greater interest in protecting intellectual property. But, as they say in China, the mountains are high and the emperor is far away. And what happens too
often at the locality or the province level is not what Beijing wants
to have happen. But, we have to keep pushing on that. And I know

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that some foreign manufacturers are sending their second-tier technology to China because of the very problem that you suggest. So,
once again, Chinas hurting itself.
With respect to all of these issues, it is so clear that opening
markets to new ideas is highly beneficial. A government that puts
restrictions that keep out inventions and new ideas hurts its own
people. And that has been known for a long, long time. But, it is
one of the issues that we need to watch carefully and deal with.
Id like to underscore what Laura Tyson has stated about the infrastructure. You know, in China they have high-speed trains that
would take your breath away, literally. And
[Laughter.]
Ambassador HILLS [continuing]. And that kind of investment
adds to a nations efficiency, cleans up the environment as people
pile aboard and dont get into the cars, and creates jobs.
And when we talk about education, yes, we need science and
math students to stimulate innovation here at home. So, its really
a great tragedy, in our great Nation that has come so far and once
led the world in educating its youth, that today roughly one-third
of our high school students fail to graduate. That is simply not tolerable in todays world.
And so, there are a lot of things that we need to do right here
at home. Maybe we need a commission on education bringing our
teachers unions together with people who deal with educational reform, for the current situation is simply not tolerable. And if we
continue down this road, United States tomorrow will not be the
same United States today.
Senator SHAHEEN. I couldnt agree more with both of you. I think
one of the challenges here has been, How do you reconcile those
needs with the deficit and the debt that we have? Andbecause
what youre talking about requires investment, and theyre longer
term, when we look at the returns on those investments. And so,
how do we address the short-term need to respond to this growing
debt and deficit that we have?
So, I will justIm out of timebut, perhaps after the hearing,
could respond to that.
Senator LUGAR [presiding]. Well, thank you very much.
In behalf of the chairman and the members of the committee, I
want to thank both of you for wonderful opening statements, which
are in the record in full, and for your responses to our questions.
The title of our hearing was Finding Common Ground With a
Rising China, and you have addressed that, and I think members
of the committee have, and perhaps increased our understanding,
and that of those who are following our hearing.
We will keep the record open, as the chairman suggested, for a
few days, for additional questions and your responses.
But, we thank you both very much.
[Whereupon, at 4 p.m., the hearing was adjourned.]

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ADDITIONAL QUESTIONS
JOINT RESPONSES

OF

AND

ANSWERS SUBMITTED

FOR THE

DR. LAURA D. TYSON AND STEPHEN S. ROACH


SUBMITTED BY SENATOR JOHN F. KERRY

TO

RECORD

QUESTIONS

Question. Where does the Economic Relationship Fit into a Larger Foreign Policy
Agenda: What are your views on the importance on the United StatesChina economic relationship as part of a larger United States-Chinese foreign policy agenda?
How has the changing economic relationship altered our broader relationship?
Specifically, are there ways that our economic interdependence constrains U.S.
foreign policy options on other issues of concern, such as nonproliferation policy,
human rights, Taiwan? Are Chinas foreign policy options similarly constrainedif
so how?
Answer. United States-China economic relationships have been a major focus of
the larger United States-China foreign policy agenda during the last quarter century and that will remain the case for the foreseeable future. U.S. policy toward
China has been one of engagement rather than containment or competition. The
United States has welcomed China as an increasingly prosperous and successful
member of the community of nations and has championed Chinas growing role and
responsibilities in global multilateral institutions. And China has embraced economic globalization and has been a reliable global citizen committed to the goals of
peace and prosperity. These trends are likely to persist: given the priority of economic growth and development to both its domestic political stability and the legitimacy of its leadership, China has too much to lose to threaten the peace and global
economic order on which its growing prosperity depends.
The growing economic links between China and the United States have strengthened the overall relationship between the two nations and have supported their
cooperation on many shared interests including promoting global development,
addressing global health and environmental challenges, and containing piracy and
terrorism.
Both China and the United States have reaped significant economic returns from
the large trade and capital flows that link their economies, and both nations have
to weigh these returns when they consider how to address areas of disagreement
such as nonproliferation policy, human rights, Taiwan and other territorial concerns. In that sense, the foreign policy options of both nations are constrained by
their economic interdependence: options that impede the trade and/or capital flows
between them would reduce the economic welfare of both of them. Thats why both
nations should seek to address issues of concerns in other foreign policy areas
through bilateral consultation rather than through unilateral confrontation, avoiding economic sanctions to pursue their foreign policy goals in other areas and using
multilateral and/or regional institutions and agreements whenever possible.
Question. National Security and the Chinese Economy: Do Chinas leaders think
in terms of national security when they consider the size, composition, pace of development and protection of Chinas economy? If so, how does this impact their foreign
and commercial engagement with the United States and other nations? What is the
most appropriate and effective U.S. policy response? What is the best way to pursue
our national economic interests and national security interest with Chinaside by
side?
Answer. Despite its dramatic economic progress, China is still a poor country, as
measured by its GDP per capita, and confronts large domestic problems including
large rural-urban inequalities, a significant pool of underemployed labor in agriculture, and environmental degradation from rapid industrialization. Moreover, the
legitimacy of Chinas authoritarian leadership depends primarily on its ability to
deliver rising living standards to its population. For these reasons, Chinas leaders
believe that both Chinas national security and their political security depend on the
growth and development of Chinas economy: these remain their primary goals and
these goals are the primary determinants of their decisions and actions both at
home and abroad.
When China joined the WTO, it made significant concessions to liberalize its
traditional trade and investment policies as part of its accession agreement. Since
that time, Chinas trade has soared and it has gained significant shares in many
global markets. In recent years, China has been relying more on nontraditional barriers such as discriminatory government procurement policies, national standards
policies, lax enforcement of intellectual property protection, and local content requirements to boost the competitiveness of its domestic companies. Such practices
impede the access of U.S. and other foreign companies to Chinas domestic market

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and they are a violation of the spirit and in some instances the law of Chinas WTO
commitments.
The United States should continue to treat such market access barriers as a priority issue in the S&ED trade discussions, should lodge WTO cases against such
barriers, and should encourage Chinas other trading partners to address such barriers in regional and multilateral discussions. The United States should rely as
much as possible on multinational, multilateral forums such as the G20, the WTO,
the IMF and the U.N. to pursue U.S. economic interests with China and to address
bilateral economics disagreements.
Question. Chinas Treasury Holdings: Chinas large holdings of U.S. Treasury
securities, which totaled $900 billion as of April 2010, make it the largest foreign
holder of those securities.
Some U.S. analysts welcome Chinas purchases of U.S. debt, which help enable
the United States to fund its budget deficit and keep U.S. interest rates relatively
low. Others have expressed concerns that Chinas large holdings of U.S. debt could
give it significant leverage over the United States. How should we weigh the risks
against the benefits?
Answer. Chinas large purchases of U.S. debt over the last several years have indeed helped to fund the U.S. Federal budget deficit and have kept U.S. and global
interest rates lower than they otherwise would have been. These purchases are a
reflection of the large and ultimately unsustainable imbalances between saving and
investment in both countries. The United States saves too little and consumes more
than it produces while China saves too much and produces more than it consumes,
relying on the United States and other nations to purchase its excess production.
Both countries need to adjust their growth strategies, with the United States relying
less on consumption and more on exports and investment to drive growth and China
relying more on domestic demand and less on exports. The United States must also
adopt a multiyear deficit reduction plan to stabilize the debt to GDP ratio at a sustainable level since dissaving by the U.S. Government is a major contributor to the
nations saving-investment gap.
China has not caused the imbalance between saving and investment in the United
States or the fiscal deficit. These are problems resulting from policy choices made
at home. To date, the benefits of Chinas purchases of U.S. Government debt have
outweighed the risks. And on economic grounds, China is likely to continue to purchase large amounts of U.S. Governments. But there are risks associated with Chinas large purchases and holdings of U.S. Government securities. In particular, as
we argue in our testimony, even a relatively small decline in Chinas holdings could
be enough to rock global financial markets, triggering a large increase in interest
rates and a sharp decline in the dollars value. China itself would suffer large capital losses on its holdings of U.S. securities as a result. Many observers believe that
because of such large potential losses, there is a very low risk that China would use
its holdings of U.S. securities to try to influence U.S. policy. In our testimony, we
argue that this risk is higher than commonly perceived. For a variety of reasons
identified in our testimony, a threat by China to move away from U.S. treasuries
in order to change U.S. behavior or in retaliation for U.S. behavior should be taken
seriously by U.S. policymakers. Under current financial market conditions, such a
threat could trigger investor concerns about the huge financing needs of the U.S.
Government, causing a sharp spike in interest rates and a crisis of confidence in
U.S. sovereign debt that could cause serious economic harm to both the United
States and China.
Question. Competitiveness and U.S. Infrastructure: You mentioned that support
for infrastructure investment in the United States was one way to bolster U.S. competitiveness when facing a rising China. Could you please explain to what extent
infrastructure investment would reinforce U.S. competitiveness and what needs to
happen to ensure adequate infrastructure investment at the pace and scale to ensure U.S. competitiveness in the future?
Answer. A significant and sustained increase in infrastructure investment by Federal, State and local governments should be a priority. Unlike most other forms of
stimulus, spending on infrastructure both increases demand when the spending occurs and increases the supply and growth potential of the economy over time The
demand-side case for infrastructure investment is well documented. According to the
Congressional Budget Office, infrastructure spending is a cost-effective demand
stimulus as measured by the number of jobs created per dollar of budgetary cost.
Moodys Economy.com estimates that $1 of infrastructure spending increases demand and the level of GDP by about $1.59.

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The supply-side or growth case for a significant increase in infrastructure investment is also compelling. Real infrastructure spending is about the same today as
it was in 1968 when the economy was a third smaller. The inadequacies of the countrys current infrastructure are displayed every day in freight bottlenecks, road congestion, and airport delays, all of which reduce business productivity and make the
United States a less attractive location for business activity. Documenting these inadequacies, the American Society of Civil Engineers gave Americas infrastructure
a failing grade of D in its 2009 report and has identified more than $2.2 trillion
in outstanding infrastructure needs. And using a narrower cost-benefit approach, a
2008 CBO study concluded that a 74 percent increase in annual spending on transportation infrastructure alone is economically justifiable.
Over the next 5 years, the Federal Government should work with State and local
governments and the private sector to finance $1 trillion of additional investment
in infrastructure. The successful Build America Bonds (BAB) program included in
the current stimulus package should be extended to support this goal. As part of
its commitment to a multiyear infrastructure plan, the Federal Government should
also establish and provide the capital for a National Infrastructure Bank. An appropriately designed and governed national infrastructure bank would both address
gaps and shortcomings in the current system for selecting and funding infrastructure projects and attract private investment funds for such projects. The bank would
focus on transformative projects of national significance, like the creation of a national high-speed rail system or the modernization of the air traffic control system,
that require the participation and coordination of many States. Such projects are
neglected by the formula-driven processes now used to allocate Federal infrastructure funds among States and regions. The bank would provide both coordination
among diverse actors and certainty about the level of Federal funding for such
multiyear projects by removing funding decisions from the politically volatile annual
appropriations process. Moreover, the bank would select projects for funding, not on
political and earmarking considerations that too often influence project selection in
the current system, but on independent and transparent cost-benefit analysis by
objective experts.
Armed with a flexible set of financing tools, including direct loans, loan guarantees, grants, and interest subsidies for BABs, the bank could provide the most
appropriate forms of financing for each project. The bank should be granted the
authority to create partnerships with private investors on individual projects. Public-private partnerships would both increase the total amount of funding for infrastructure investments and foster efficiency in project selection, operation, and maintenance. Such partnerships are becoming common in infrastructure financing
around the world and many nations are using them to attract private capital, but
to date they account for a miniscule share of infrastructure financing in the United
States. A national infrastructure bank could tap into the significant pools of longterm private capital in pension funds and dedicated infrastructure equity funds
looking for infrastructure investment opportunities.
The Federal Government can afford a capital commitment of at least $25 billion
to establish a national infrastructure bank as an additional stimulus measure immediately. Given the significant excess capacity in the economy and the very low
interest rates at which the U.S. Government can borrow funds, there is no danger
that an additional stimulus of this size will trigger a crisis of confidence in the U.S.
Governments creditworthiness. Nor is there any danger that infrastructure investment financed by the bank will crowd-out private investmentin fact, it is likely
to encourage or crowd-in such investment.
As the economy recovers, however, the Federal Government must embark on a
multiyear plan to reduce the deficit and stabilize the debt to GDP ratio. To ease
capital market anxiety about the Governments future borrowing needs, such a plan
should be developed and passed by the Congress now. The plan should include permanent funding mechanisms for the national infrastructure bank. These mechanisms could include a small share of funds from a new multiyear transportation bill,
a small share of revenues from the gasoline tax or from a new carbon tax, and user
fees. Whenever appropriate and feasible, user fees should be linked to the projects
financed by the bank. Such fees would not only raise revenues but would also encourage the efficient use of infrastructure assets and provide financing for their
maintenance.
The United States needs to invest significantly more in its infrastructure to secure its competitiveness and deliver rising living standards to its citizens. And there
is no better time to begin that investment than now when millions of Americans
can be put to work in meaningful jobs to help build the infrastructure we need.

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JOINT RESPONSES

OF DR. LAURA D. TYSON AND STEPHEN S. ROACH TO


SUBMITTED BY SENATOR RICHARD G. LUGAR

QUESTIONS

Question. At the hearing, you indicated that the United States needed to make
structural economic changes, increase investments in infrastructure, increase education levels and, over the long run, reduce the deficit. In order to support U.S. economic growth and increase employment, what specific structural changes does the
United States need to make?
Answer. To reduce its imbalance between saving and investment and its
unsustainable current account deficit, the United States must introduce policies to
increase national saving and to encourage a shift in the composition of demand
away from consumption and toward exports and investment. The most important
step is passage of a multiyear deficit reduction policy that stabilizes the debt to
GDP ratio at a stable level. This plan should include a major reform of both personal and corporate tax policies to encourage personal saving and business investment. But the plan must also increase government investments in infrastructure,
R&D and education. Such investments are essential to boost the competitiveness of
the United States as a location for high value-added economic activity and as a
source of global exports.
Question. You note in your written testimony that reducing barriers that impede
the access of U.S. companies to Chinas markets is and should continue to be a
major objective of U.S. trade policy. The United States participates in 49 bilateral
dialogues with China including economics, trade, politics, energy, and health and
engages with China in multilateral for a including the WTO, G20 and United
Nations. What more should the United States do to advance our economic objectives
with China?
Answer. Reducing nontariff barriers that impede the access of U.S. companies to
Chinas market is and should continue to be a major objective of U.S. trade policy.
Given the importance of the government and state-owned companies in Chinas
economy, Chinas participation in the Government Procurement Agreement (GPA)
should be a major objective. The United States should negotiate with China to ease
U.S. security controls on U.S. exports to China and to advance the timing for the
recognition of Chinas market economy statues in the WTO (currently scheduled for
2016) in return for a strong offer by China to join the GPA. An agreement along
these lines could also help revitalize the Doha Round talks, something that the
United States and China committed to do at the last S&ED meetings.
The United States should also take the lead in negotiating a Trans-Pacific Partnership agreement as a first step toward the creation of a free trade area for the
Asia Pacific. Several bilateral and regional preferential trading agreements have recently been signed in Asia and the region is heading toward the de facto creation
of an economic bloc that would discriminate against the United States. The completion of a Trans-Pacific Partnership agreement would arrest this disturbing trend
and could reignite APECs leading role in global trade liberalization. A revitalized
APEC could lead a regional effort for a free trade agreement on green technologies
and products.
Question. Too often around the world, the revenues from natural resources are a
hindrance to economic and political development. Moreover, conflict over resource
revenues can drive price instability and harm supply of oil. In my judgment, promoting transparency is a pivotal need for empowering citizens to ask questions of
their governments and hence be empowered to grow economically and democratically. One measure I have offered with Senator Cardin would enhance U.S. leadership by requiring U.S. and foreign companies listed here to disclose their payments
to governments as part of Securities and Exchange Commission filings. The importance of U.S. leadership is highlighted with recent mineral discoveries in Afghanistan. Chinas growing economy also requires oil, gas, and minerals, and at times the
government backs their companies entry into countries. In your assessment, how
can we make progress at a governmental and corporate level with China to improve
Chinese support for good governance of resources?
Answer. A basic tenet of economics is that market efficiency and competition depend on information, and there is a serious lack of information about the terms of
the deals about access to natural resources between governments and private companies. Without such information, there is also ample opportunity for corruption in
the decisions by which natural resource rights are allocated. A compulsory disclosure of payments by governments to private interests in natural resource deals is
an idea that merits serious consideration.

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China and the United States have a common interest in the gains to efficiency
and competition and the obstacles to corruption that would result from global or regional agreements that enforce transparency and good governance in natural resource deals between companies and governments. The United States should raise
this issue in the S&ED meetings with China and should explore the possibility of
cooperating with China to foster a global agreement on this issue within in a multilateral organization like the U.N. or the OECD.
Question. China is currently going through a period of labor unrest and wages are
rising in many areas in response. Some American businessmen believe this wage
inflation will cascade throughout much of the manufacturing sector. Do you believe
this is likely to happen and if so, will Chinese officials find it too much to swallow
to also allow their currency to appreciate? In other words would sharply rising
wages dampen the pace and size of any currency appreciation? Would the impact
on the United States-China trade balance of widespread wage inflation be similar
to, or different from, the impact of currency appreciation?
Answer. Contrary to Western press reports, China is not going through a period
of labor unrest. The recent increases in wages are a conscious outgrowth of government regulations introduced in 2004, which stipulated that provincial governments
increase minimum wages of Chinese workers every other year. During the crisis of
200809, when Chinas export businesses were under severe pressure, those increaseslike the currency appreciation policywere suspended. The gains evident
this year were largely a catchup from that hiatus. Even in the aftermath of this
latest round of wage inflation, compensation per hour in Chinese manufacturing industries is still only about 4 percent of the comparable pay rate in the United
Stateshardly a signal that the days of low-cost Chinese labor are numbered. Moreover, total personal income in China is currently only about 42 percent of GDP
less than half the 85 percent reading the United States. In the upcoming 12h FiveYear Plan, the government will make a determined effort to boost the wage share
of national income in an effort to raise consumer purchasing power. This policy
should not be viewed as an offset to a further, albeit gradual, pace of currency appreciation in the years ahead. However, to the extent that it is part of a
proconsumption policy agenda, that will absorb surplus household saving, it can be
expected to reduce Chinas overall current account and multilateral trade surplus.
Whether that translates into a smaller bilateral imbalance with the United States,
it is equally dependent on actions taken by the United States to boost Americas domestic saving ratenecessary to reduce the multilateral trade deficits with China
(and, by the way, with 89 other nations) that are an important outgrowth of our
unprecedented saving shortfall. A critical first step is passage of a multiyear deficit
reduction plan that stabilizes the debt to GDP ratio.

RESPONSES

OF

AMBASSADOR CARLA A. HILLS TO QUESTIONS SUBMITTED


SENATOR JOHN F. KERRY

BY

Question. Where does the Economic Relationship Fit into a Large Foreign Policy
Agenda?
What are your views on the importance of the United States-China economic
relationship as part of a larger United States-China foreign policy agenda?
How has the changing economic relationship altered our broader relationship?
Specifically, are there ways that our economic interdependence constrains U.S.
foreign policy options on other issues of concern such as nonproliferation policy,
human rights, Taiwan? Are Chinas foreign policy options similarly constrainedif so how?
Answer. It is nearly impossible today to separate our Nations economic and foreign policy issues. Challenges in one area profoundly affect our ability to be successful in the other, and nowhere is that more apparent than with respect to our relationships with China, the worlds fastest growing large economy.
Our Nations stature as a foreign policy leader requires that we maintain a strong
economy. Building a strong economic relationship with China contributes significantly to our Nations growth and prosperity. Currently China is our third-largest
and fastest growing export market. The benefits of our trade opportunities with
China have been experienced across America. Virtually every state in the union experienced triple digit increases in exports to China in the decade to 2008, while
sales to the rest of the world over the same period grew by just 29 percent. With
domestic consumption and investment currently quite weak, strong export growth
gives our economy a welcome economic boost.

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As two of the worlds major players, China and the United States will need to collaborate if we are to deal effectively with a long list of challenges like nuclear proliferation, terrorism, drug and human trafficking, piracy, climate change, and
pandemics. It is less that we are constrained by our economic interdependence, and
more that our aggregate economic strength provides a means to mobilize the capacity to deal successfully with a growing list of issues that cannot be solved unilaterally in todays globalized world. Indeed, in many instances both China and the
United States must collaborate if solutions are to be found.
We will continue to have our differences with China on economic and foreign policy issues as we do from time to time with even our close allies. But we will be better able to bridge those differences and to find solutions that advance the interests
of our respective populations by taking actions calculated to build a closer, more
candid and constructive bilateral relationship. Taiwan is a case in point. China regards the Taiwan issue as a core interest involving its sovereignty and believes
that we deliberately ignore its sensitivity. Since resuming diplomatic relations with
China in 1979, the United States has sought to avoid debating whether Taiwan is
part of one China but has been clear that Taiwans future should be decided without the use of force. Our government pledged in the Taiwan Relations Act, also
signed in 1979, to provide defensive weapons to ensure that Taiwan could defend
itself again an attempt at forceful acquisition. At the present time, the Chinese have
an arsenal of missiles in Fujian pointed at Taiwan, and we continue to supply advanced weaponry to Taiwan. The trust among our two militaries lags far behind the
trust that exists among our leaders dealing with economic or strategic issues. One
could imagine that if we were able to convene a high level and regular Strategic
Military Dialogue that it might be possible to reach an understanding whereby
China gradually reduced its stock pile of missiles in Fujian and as that positive action occurred the United States delayed sales and downgraded the level of weaponry
sold to Taiwan. That sort of deal would require building a much closer and collaborative military-to-military relationship that today does not exist.
Question. National Security and the Chinese Economy
Do Chinas leaders think in terms of national security when they consider the
size, composition, pace of development and protection of Chinas economy?
If so, how does this impact their foreign and commercial engagement with the
United States and other nations?
What is the most appropriate and effective U.S. policy response?
What is the best way to pursue our national economic interests and national
security interest with Chinaside by side?
Answer. The primary foreign policy goal of the Chinese leadership is to maintain
peace at Chinas borders shared with 14 nations that suffer from varying degrees
of instability. China seeks stability in the region and at home so that it can focus
on its difficult domestic challenges including existing poverty, income disparity between rural and urban populations, serious environmental concerns including extensively polluted water supplies, foul air and loss of arable land, unemployment, inadequate health care, and a rapidly aging population. Domestically the leadership has
made stability preservation its top priority. The leadership believes that in order
to maintain domestic support it must implement policies that ensure that Chinas
economy continues to grow in ways that will increase prosperity to those who to
date have been left behind and to deal with the issues that affect quality of life in
China. Over the past three decades in an effort to spur its economic growth, China
has opened its markets to foreign investment and reduced its trade barriers, looking
to exports and heavy industry to provide the engine of economic growth. Although
significant restrictions remain, they are far fewer than existed a decade ago when
China joined the World Trade Organization. Overall, the opening of Chinas markets
has both generated domestic economic growth and contributed to global economic
growth.
Last year when global growth turned negative and world trade plummeted more
than 11 percent, China, along with other nations including the United States, experienced a surge of economic nationalism. Politics in China drove Buy China policies just as politics here drove Buy America policies, notwithstanding objective
economic analysis showed that such policies are detrimental to growth and serve to
strain international relations. Bilateral fora like the Strategic and Economic Dialogue and the Joint Commission on Commerce and Trade have been helpful in removing restrictions and building greater understanding. Meetings of leaders and
ministers that represent the worlds 20 largest economies (the G20), that in total
comprise 85 percent of world output and 80 percent of world trade, also provide a
useful forum for seeking to reduce trade and investment restrictions. Of course
where a particular trade or investment policy is deemed to violate a WTO agree-

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ment and negotiation has not resolved the difference, it is appropriate to use the
WTO dispute settlement mechanism to resolve the difference, something which both
the United States and China have done, thus minimizing potential friction.
In many instances the national economic interests and the national security interests of the United States and China overlap. Both nations want a vibrant global
economy that contributes to domestic growth. Similarly both want stability internationally. In some circumstances where we agree on the ends, we differ with respect to the best means to achieve those ends. For example, China and the United
States both want to curtail nuclear arms in Iran. China has favored extended diplomacy over sanctions. As a result of our strategic dialogues, China has been willing
to support the U.N. resolutions providing for sanctions but has not been willing to
support the tighter measures that the U.S. Congress adopted.
In other circumstances we disagree on the risk involved. That is the case with
the nuclear ambitions of North Korea. China assesses the risk of North Korea developing an effective nuclear weapon as lower than does the United States. It fears
more a collapse of the North Korean Government, worrying it would lead to a flood
of North Korean refuges crossing Chinas north east border causing instability in
Liaoning and Jilin provinces and violating Chinas top domestic policy of stability
preservation. We are more apt to find means to deal with both of our concerns
through regular and frequent dialogue. What is missing today is a regular and highlevel military dialogue to encourage both sides to better understand the others risk
assessments and to talk about ways to deal with our respective concerns.
Question. Chinas Treasury Holdings. Chinas large holdings of U.S. Treasury
Securities which totaled $900 billion as of April 2010 make it the largest foreign
holder of those securities. Some U.S. analysts welcome Chinas purchases of U.S.
debt which helps enable the United States to fund its budget deficit and keep U.S.
interest rates relatively low. Others have expressed concerns that Chinas large
holdings of U.S. debt could give it significant leverage over the United States.
How should we weigh the risks against the benefits?
Answer. Both those who welcome Chinas continued purchase of our growing debt
and those who express concern over our increasing debt being in foreign hands overlook a critical point. The fact is that there is a serious imbalance in the global economy that has ballooned to unsustainable levels in recent years and puts our future
economic stability at severe risk. China, Germany, Japan, South Korea, and other
Asian economies have built their growth primarily on exports, whereas the United
States, the United Kingdom, and Spain, among others, have relied excessively on
domestic consumption, particularly in the housing sector, to fuel their economic
growth.
Economists agree that neither of these singly focused growth models is sustainable, and being unsustainable they will change either through gradual policy adjustment or as a result of traumatic financial upheaval.
To protect against future financial crisis will require debtor and creditor nations
to adopt more balanced growth plans. Debtor nations cannot continue to consume
at the excessive levels of the past, and creditor nations must look more to their own
consumers to fuel their economic growth.
Most economists agree that continuing to rely on the growth models of the past
decade raises the risk of a crisis to unacceptably high levels. The required changes
could constructively be led by the United States, the worlds largest debtor nation,
and by China, the worlds largest surplus nation.
The necessary changes will take time to implement. But it would provide substantial market assurance if the United States and China would publicly lay out a specific 5-to-10-year rebalancing plan at the next meeting of the G20. Each could set
forth benchmarks for measuring progress, and provide periodic updates on achievements.
RESPONSES

OF

AMBASSADOR CARLA A. HILLS TO QUESTIONS SUBMITTED


SENATOR RICHARD G. LUGAR

BY

Question. You implied that financial and trade protection would have a negative
impact on the U.S. economy. Would you please delve into those details on why a
rise in protectionism would have bad repercussions? How exactly does protectionism
work itself through our economy?
Answer. For the six decades following World War II, under both Democratic and
Republican administrations, the United States has led the world in opening global
markets. The results have been spectacular. Americas policy of seeking to remove
barriers to cross border trade and investment has greatly enhanced our Nations

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economic growth and the economic well-being of its citizens. As world trade and investment has exploded, standards of living have soared at home and abroad.
A highly regarded economist, Dr. Gary Hufbauer, in a comprehensive study published in 2005 by the Institute for International Economics, now the Peterson Institute for International Economics, calculated that the opening of markets since
World War II has increased our Nations GDP by roughly $1 trillion per year, thus
raising the average American household yearly income by $9,500.
Our trade and investment in every region of the world have contributed to this
very positive result. Last year when trade plummeted by more than 11 percent, the
United States economy contracted by about 2 percent. This year with trade up by
7 percent, the International Monetary Fund is predicting that the U.S. economy will
grow by more than 3 percent. With domestic demand and job growth still depressed,
external demand is more important than ever.
Unfortunately economic hardship inevitably stokes demands for protection. Yet
policies that restrict trade and investment choke off the growth that is especially
needed in times of economic adversity. Making matters worse, protectionism is highly contagious. When the United States adopts Buy America policies, almost instantaneously our major trading partners, like China, implement a Buy China policy.
Hence it behooves us to make every effort to explain to the public the harm that
results from protectionism and the benefits that flow from opening markets to our
products and services.
Dr. Hufbauers study calculates that the additional opening of world markets to
trade and investment would increase U.S. wealth by an additional $500 billion per
year, making the average American household richer by an additional $4,500 per
year.
It is well documented that jobs connected to international activity earn on average
13 to 18 percent more than jobs in the overall economy. A majority of our exporters
are small- and medium-sized businesses that serve as the backbone of Americas job
creation. The prospects for these businesses and their workers are enhanced by our
governments success in the opening of foreign markets.
By ratifying the three pending trade agreements with Panama, Colombia, and
South Korea, completing the Trans-Pacific Partnership, and concluding the Doha
Development Round the United States could generate additional growth opportunities for the United States and global economies and help keep protectionist impulses
at bay.
Question. Your written testimony notes that one way to strengthen U.S. investment ties while ensuring U.S. competitiveness is for the United States to approve
the three pending free trade agreements (FTAs) that have been signed with South
Korea, Colombia, and Panama. Recently, Senator Kerry and I sent a letter to the
administration calling for the Korea-United States FTA to be sent to the Congress
for a vote. Also this year, I introduced a resolution in the Senate calling for the administration to develop a framework for FTA negotiations with the Association of
Southeast Asian Nations (ASEAN). Over the last 5 years, China has signed nine
FTAs including ones with Korea, New Zealand, and the nations of ASEAN. Please
describe how U.S. business interests are disadvantaged when competing against
China interests in areas where China has an FTA and the United States does not.
Answer. Bilateral and regional free trade agreements are proliferating around the
world. The World Trade Organization (WTO) finds there are 262 free trade agreements (FTAs) in force today; the United States is a party to just 17. An additional
100 are currently being negotiated. The United States is negotiating one, the TransPacific Partnership agreement. As a result our entrepreneurs and their workers are
disadvantaged vis-a-vis their competitors in countries that have free trade agreements in place which affects our Nations capacity to grow and to create jobs.
That fact is starkly documented in the World Economic Forums annual report
Global Enabling Trade that ranks 125 countries on a range of factors affecting
competitiveness. One factor it measures is tariff barriers that impede competitiveness. Chile, as a result of its network of trade agreements, is ranked No. 1, indicating that Chiles exporters face the lowest tariffs globally. The United States with
few trade agreements is ranked 114 out of the 125 countries indicating the poor
competitive position faced by our exporters. Of course there are many other trade
restrictions beyond tariffs that trade agreements alleviate, but the metric on tariffs
is illustrative.
The job gains from our trade agreements are substantial. This past May the U.S.
Chamber of Commerce released its study Opening Markets, Creating Jobs, Estimated U.S. Employment Effects of Trade with FTA Partners. Using a general equilibrium economic model, this study examined the 14 FTAs the United States has
implemented over the past 25 years, excluding three agreements most recently im-

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plemented. It found that 17.7 million U.S. jobs depend on trade with these 14 countries and 5.4 million of these jobs were attributed to the increase in trade resulting
from the free trade agreements.
U.S. exporters can lose their competitiveness rapidly when other governments remove trade barriers for their entrepreneurs and our government does not. A study
issued on May 10, 2010, undertaken in the House of Representatives by the ranking
member of the Ways and Means Committee, the ranking member of the Trade Subcommittee of the Ways and Means Committee, and the ranking member of the Agriculture Committee documented that between 200408 Colombias agriculture market was expanding at 38 percent per year and had become the largest market for
U.S. agriculture exports in South America totaling over $4 billion. In 2009, after Colombia entered a free trade agreement with Mercosur, U.S. agriculture exporters
market share in Colombias agriculture market fell by 31 percent while the market
share of competitors from Argentina and Brazil climbed 22 percent. In 1 year American saw their combined sales of corn, wheat, soybeans, and soybean oil plunge 62
percent even as Colombian total imports held steady and to date records show 2010
sales of those products are down 45 percent.
China is the worlds largest exporter. It has arranged 14 trade agreements with
the 31 economies including 10 nations that comprise the Association of Southeast
Asian Nations (ASEAN), is negotiating 5 additional agreements, and is considering
negotiations with 2 large economies, India and South Korea.
U.S. competitiveness in the markets where we do not have trade agreements but
China does is being adversely affected. It should be noted that the network of agreements that China has and is negotiating in Asia will disadvantage American entrepreneurs in the worlds fastest growing region. Sadly, the harm is self inflicted.
Question. Too often around the world, the revenues from natural resources are a
hindrance to economic and political development. Moreover, conflict over resource
revenues can drive price instability and harm supply of oil. In my judgment, promoting transparency is a pivotal need for empowering citizens to ask questions of
their governments and hence be empowered to grow economically and democratically. One measure I have offered with Senator Cardin would enhance U.S. leadership by requiring U.S. and foreign companies listed here to disclose their payments
to governments as part of Securities and Exchange Commission filings. The importance of U.S. leadership is highlighted with recent mineral discoveries in Afghanistan. Chinas growing economy also requires oil, gas and minerals, and at times the
government backs their companies entry into countries. In your assessment, how
can we make progress at a governmental and corporate level with China to improve
Chinese support for good governance of resources?
Answer. The vast majority of U.S. companies are good ambassadors overseas. In
challenging environments they bring American values and demonstrate a positive
agenda of corporate social responsibility. Expanding their competitive opportunities
will lead to a spread of U.S. values including corporate social responsibility.
The G20 summit meetings provide a multilateral forum where this issue so critical to improving global governance can be discussed beneficially. It is clear that
transparency with respect to resource payments to governments would help to limit
corruption, enhance global stability, and promote global growth. Leaders of the
worlds 20 largest economies could agree that they would support transparency with
respect to payments made to governments for natural resources by requiring their
companies to make such disclosure. The United States could lead by example by
adopting the reporting measure that you have suggested.
The Strategic and Economic Dialogue meetings provide a bilateral forum where
the United States and China could discuss the benefits that would flow from transparency with respect to resource payments made to governments. An understanding
followed by action would give tangible proof of the value of the bilateral dialogue.
Question. China is currently going through a period of labor unrest and wages are
rising in many areas in response. Some American businessmen believe this wage
inflation will cascade throughout much of the manufacturing sector. Do you believe
this is likely to happen and if so, will Chinese officials find it too much to swallow
to also allow their currency to appreciate? In other words would sharply rising
wages dampen the pace and size of any currency appreciation? Would the impact
on the United States-China trade balance of widespread wage inflation be similar
to, or different from, the impact of currency appreciation?
Answer. Chinas 2010 overall inflation rate between January and May ranged between 1.5 percent and 3.1 percent, higher than in 2009 in the midst of the global
recession, but considerably lower than in 2008 when the rates between January and
May ranged between 7.1 percent and 8.5 percent.

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There has been pressure to increase wages in the manufacturing sector. On July
8, Beijing issued its 2010 wage guidelines indicating an average 11-percent salary
increase covering both government and enterprise workers. Undoubtedly, Chinese
officials will watch closely to see how the higher wage rates affect both growth and
inflation.
Chinas competitiveness will be affected by increases in inflation as well as increases in wages. The benefit of wage increases, if inflation remains under control,
is that they will encourages domestic consumption which will help to rebalance Chinas domestic economy that currently relies too heavily on exports and too little on
domestic consumption for growth. Inflation driven by increases in the prices of consumer goods such as housing and food is likely to depress consumption. In recent
months China has taken measures to slow the housing boom. There is increased recognition within Chinas leadership of the need to implement policies so as to stimulate domestic consumption and to reduce those that encourage expansion of heavy
industry and exports in order to achieve a more sustainable model for economic
growth.
RESPONSES

OF

AMBASSADOR CARLA A. HILLS TO QUESTIONS SUBMITTED


SENATOR RUSSELL D. FEINGOLD

BY

Question. I have serious concerns regarding past and ongoing human rights
abuses in China, including oppression of ethnic and religious minorities, notably in
Tibet, and of political dissidents and restrictions on press and assembly, just to
name a few. As China continues its economic growth and increases its role on the
world stage, what should we expect to see with respect to Chinas human rights
record 10 years from nowpositive steps and improvements or a continuation of repression and human rights violations? Is the issue of human rights being adequately
addressed in our bilateral engagement, and how can the United States better influence the Chinese on this issue?
Answer. Although it is impossible to predict with any precision the domestic political environment that may exist in any country a decade hence, my hope and expectation is that as China gains the confidence that comes with its enhanced economic
security and increased role on the world stage, its leadership will respect widely
accepted international norms including those dealing with human rights. Chinas
leadership is increasingly active in international institutions including the United
Nations Security Council, the International Monetary Fund, the World Trade Organization, the World Bank, and most recently the G20. All are built on a platform
of transparent rules. Only by becoming a responsible stakeholder in these organizations can China establish and maintain a global leadership role that I believe its
leaders want to achieve.
Chinas domestic political and social reforms have been much slower in developing
than its economic reforms that have transformed the country with unprecedented
speed. Still there has been social change since the horrific revolutionary period
(19601970) of Chairman Mao Zedong. Since 1978 when Deng Xiaoping began the
reforms to open China to the world, Chinas Government has steadily reduced the
social and to a lesser extent the political restrictions that the Chinese people faced
a generation ago. However I do not see broad support for Western-style democracy
in China today where according to numerous polls the vast majority of Chinese believe their government is on the right track. Nonetheless there is considerable talk
among the elite and scholars of the need to enhance pluralism, build an independent
judiciary, respect the rule of law, and increase transparency.
Over the past several years reformers in the Central Party School, which serves
as the premier training ground for emerging Communist leaders, as well as university scholars have started to debate openly the merits of expanding grassroots political participation, judicial independence, and elections for top party posts. For example, in 2008 Yu Keping, an adviser to President Hu Jintao and Professor and
Director of the China Center for Comparative Politics & Economics in Beijing wrote
a widely quoted book entitled Democracy is a Good Thing. Significantly, President
Hu in his work report presented to the People Congress in March 2008 urged the
Party to adapt to the growing enthusiasm of the people for participation in political
affairs by expanding grassroots democracy, increasing transparency, and exercising
power under the sunlight to ensure that it is exercised correctly. In Global Asia,
a Journal of the East Asia Foundation, Yu Keping writes in the summer 2010 issue:
[W]hatever political reforms China carries out, and whatever kind of governance model takes shape in the future, for the countrys far sighted leaders the objectives of the governance reform are already irrefutably clear:

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democracy, rule of law, fairness, responsibility, transparency, integrity, efficiency, and harmony.
Similarly Zhou Tianyong, senior economist and deputy head of research at the
Central Party School stated in a 2008 interview published by the Daily Telegraph:
We have a 12-year plan to establish a democratic platform. He claimed that the
government was determined to reform itself, but there had been some infighting between different departments, and he called for the number of ministries to be cut
in half to form a modern government structure adding there will be public democratic involvement at all government levels. As support for his positive projection,
Professor Zhou said: There will be many more nongovernmental organizations,
chambers of commerce, industry associations and other social groups. Religion
should also be given a wider platform to play a positive role. We should protect religious freedom. Although he did not predict the end of the one-party rule, he did
state that by 2020 China will basically finish its political and institutional reforms.
People can argue about whether China will achieve those goals. But the fact that
Communist Party members within the Party School are publicly talking in these
terms indicates that there is some basis to believe that a greater liberalization of
politics is underway. This kind of public debate regarding politics represents change
for it would not have been permitted a decade ago.
Public lecturing from the outside in my view is counterproductive. Our government can most effectively deal with human rights concerns where it has engaged
with China on a broad range of issues of common interest. Working together to solve
problems of mutual concern helps to build trust and create relationships that permits candid discussion of differing views and encourages the bridging of differences.
There are instances where that has occurred. For example, China joined in denouncing North Koreas nuclear test in 2006, voted to impose and then tighten U.N. sanctions against Iran, supported deployment of U.N.-AU forces to Darfur, condemned
the brutal crackdown in Burma, helped in dealing with kidnapping and piracy off
the coast of Somalia, and has been constructive in a number of humanitarian efforts. We need to build on our successes. Many of our conflicts occur in areas that
involve our militaries. Regular and frequent military dialogues at the highest levels
would be helpful in avoiding and resolving a number of our differences.
The private sector can also be helpful. NGOs continue to multiply in China. They
are changing public perceptions. Our corporations doing business in China follow
high standards that set an example. Also, there are a number of Tract II dialogues
that talk about how rule of law, transparency and respect for minority rights contribute to domestic stability and counter corruption, which are objectives given high
priority by the Chinese government.
Question. In recent years, China has emerged as a significant economic and political player across Africa. Although Beijing continues to be primarily focused on access to oil and other natural resources, its engagement is matched by significant investments in infrastructure development, without regard to political controversies or
concerns about governance or fiscal integrity. I dont think American interests on
the continent are necessarily threatened by Chinas activity, but it is definitely in
our interest to pay attention to this activity and consider its long-term strategic implications. How should we address that activity both in our own policy development
and in our partnerships with African Governments, particularly given our focus on
strengthening good governance and the rule of law?
Answer. Chinas investment in and trade with sub-Saharan Africa has contributed
to a substantial boost in the regions economic growth. China has given aid to most
of the countries in the region excepting the few that still recognize Taiwan. Although it began entirely with what some termed no strings attached diplomacy
which caused concern in the West as Chinese investments and aid went to governments that abused their populations, its policies appear to be evolving. China has
positively responded to international pressure.
We can applaud the fact that Chinas investment both in infrastructure and natural resources have helped to reduce poverty in sub-Saharan Africa. At the same
time we can encourage Chinas active participation in international organizations
like the International Monetary Fund and the World Bank that endeavor to advance
rule of law, transparency and respect for minority rights. These issues can also be
discussed in context of our bilateral dialogues where global stability is an issue of
concern to both governments.
Question. For over a decade, China has been Sudans closest economic partner and
its leading trade partner. China purchases about two-thirds of Sudans exports, and
provides one-fifth of its global imports. China is also the leading developer of
Sudans oil industry and a major purchaser of Sudanese oil. While Beijing has re-

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evaluated its relationship with Khartoum in recent years, it continues to be reluctant to press the Government of Sudan on issues related to peace and security. As
Sudan moves toward a 2011 referendum on self-determination, constructive engagement from China will be indispensible. What can we expect from the Chinese as we
get closer to the 2011 vote and how we can help encourage them to play a productive role within multilateral fora?
Answer. The issues in Sudan are challenging. The April 2010 election resulted in
Omar Hassan al-Bashir of the National Congress Party being elected President of
the largely Arab-Muslim North and Salva Kiir of Sudans People Liberation Party
elected President of the largely Christian and animist semiautonomous southern region. In accordance with the Comprehensive Peace Accord which ended 21 years of
brutal civil war, two referenda will be held on January 9, 2011, to determine
whether Southern Sudan will secede and form a new nation and whether Abyei, a
region with vast oil reserves, will choose to stay with the North under special administrative status or to join the South which is expected to secede. Intraregional
violence has continued in the South amidst allegations that the newly elected government is unable to maintain peace. The head of Sudans Referendum Commission
has warned that Sudan is alarmingly unprepared for the referendum. Assuming
the referendum proceeds, very tough issues of border demarcation and sharing of
oil revenues remain to be decided. Many outside observers have expressed the view
that the African Union needs to be more intimately involved. President Thabo
Mbeki, Chair of the African Union panel on Sudan, has expressed cautious optimism. The African Union held its summit in Kampala the last week of July to discuss the many daunting pre- and post-referendum concerns.
The United Nations has extended its mission in Sudan. In late July United
Nations representatives met with representatives of the African Union and expressed a willingness to work with the Sudanese Government and the international
community to ensure a free and credible referendum. China, a member of the Security Council, has voiced support for the referendum and a strong desire for stability
in the region where it has substantial investments. Since 2007, it has increased its
support of international peacekeeping missions and there is no indication that
China will alter its current policy either before or after the referenda. What actions
the two governments take after the referenda will depend on the facts on the ground
and future actions would be an appropriate subject for our bilateral strategic
dialogue.
Question. Are we paying enough attention to Chinese attitudes toward the United
Statesboth those of Chinese citizens and those of the political and military establishments? There have been some troubling press stories on this issuefor example
a survey conducted for the Sunday Times of London of Chinese-language media
found army and navy officers predicting a military showdown and political leaders
calling for China to sell more arms to Americas foes. Similarly, the Washington
Post reported earlier this year poll results indicating that many in China see the
United States as the No. 1 threat to Chinas rise. Should we be doing more in the
way of public diplomacy to China?
Answer. There are misperceptions in both China and the United States about the
other. Many in China, not only in the leadership and media but also ordinary citizens, see the United States as seeking to limit Chinas reemergence as a global
leader. At the same time many Americans including some Members of Congress and
the media talk about China as tomorrows enemy, which feeds Chinas
misperceptions regarding the United States and undercuts efforts to build a closer,
more candid, and collaborative bilateral relationship. That is why engagement at
high levels, public and private, is critical. Public diplomacy in China can be helpful.
But we need to take steps here at home. It would be helpful if more of our leaders
were to state publicly that they want to establish a closer, more candid, and collaborative bilateral relationship and to inform their fellow Americans about why and
how China is important to U.S. future prosperity and security. Most Americans are
unaware that China is our fastest growing export market and our third-largest customer behind Canada and Mexico. Many Americans complain that China limits our
inward investment and take that as a hostile act, but are unaware that recently
50 Members of Congress have expressed opposition to Chinas Anshan Iron & Steel
Group making a 20-percent investment in U.S. Steel Development Co., a small plant

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in Mississippi, that would bolster a U.S. company and create U.S. jobs. Many Americans see as evidence of protectionism Chinas procurement policies that seeks to
limit government high technology purchases to indigenous products, but do not see
our Buy America restrictions as a rough equivalent. With a better informed public,
we would be in a better position to build a stronger bilateral relationship that would
benefit both sides.

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